DIRECT TAX

Notes
1. TDS u/s 192 applies to payment of salary to an employee. The employer need not be liable for
tax audit in the PY.
2. Loss on income from house property can be set off against any other income only in the year in
which the loss has been incurred to the extent of Rs. 2,00,000. In subsequent years, loss from
house property can be set off upto any extent against income from house property.
3. Maximum deduction allowable u/s 80C is Rs. 1,50,000.
80C deduction can be availed for the following-
a) Life insurance premium (Annual premium upto 10% of the insurance policy’s total sum
assured.
b) Contribution to Public Provident Fund (PPF)
c) NABARD Bonds
d) Unit Linked Insurance Plans
e) National Savings Certificate
f) Tax Saving FD
g) Return from EPF including interest (if employees have continued service for more than 5
years)
h) Infrastructure Bonds provided investment is more than Rs. 20,000.
i) Equity linked Saving Scheme
j) Senior Citizens Saving Scheme
k) Principal repayment made towards home loan taken for purchase or construction of
residential house property provided the construction of property is completed and property
is not transferred within 5 years from possession. It does not cover a loan taken for
renovation and repairs work in residential house property.
l) Stamp duty and registration charges in the year of payment.
m) Payment of tuition fees of upto 2 children to university, college, school or other educational
institution situated in India.
4. The exemption of Rs. 3,00,000 for individuals between 60-80 years and Rs. 5,00,000 for above
60 years are applicable only for residents. For non-residents, the basic exemption limit for
individuals of all age groups will be Rs. 2,50,000.
5. Rebate u/s 87A
Only Indian residents can avail rebate. Individuals having a net taxable income after considering
Chapter VIA Deductions upto Rs. 5,00,000 shall be eligible for a rebate of maximum Rs. 12,500.
However, if the net taxable income of the individual exceeds Rs. 5,00,000 for AY 2020-21, the
rebate u/s 87A will be Nil.
6. LTCG u/s 112- 20% tax rate. Basic exemption is applicable for resident individuals and HUF and
not for non-residents. Chapter VI-A Deduction shall not be availed.
7. LTCG on income from lottery, betting, gambling etc., is taxable at flat rate of 30%. No deductions
or set off shall be allowed.
8. Non-Resident is a person who has stayed in India for a period less than 182 days in any PY.
9. Excess basic exemption after setting off against income not subject to specific tax rate shall be
set off against 112A, or other sections with specific tax rate which permit such set off.
10. 80D- Health Insurance Tax Deduction

11. 80TTA Deduction- Resident <= 60 years and non- residents- Rs. 10,000 deduction
80TTB Deduction- Resident >60 years- Rs. 50,000 deduction
12. Only municipal taxes paid in the PY will be allowed as deduction while computing income from
house property.
13. The FMV of all movable property and cash from either relatives OR non-related persons should
be considered cumulatively for Rs. 50,000 exemption threshold.
However, immovable property will be considered individually for Rs. 50,000 exemption
threshold.
14. ITR-1 – It can be filed only by an ordinarily resident individual whose total income is Rs. 50 lakhs
or less. It can be used to report salary income, one house property, residuary income (interest
etc.,) and agricultural income upto Rs. 5,000. This form cannot be filed by an individual who is a
director in a company or who has invested in unlisted equity shares.
15. 194IA- It is deductible for any person who purchases immovable property other than rural
agricultural land in India where the consideration for transfer of immovable property is <= Rs.
50,00,000. In case of co-owned property, the entire consideration shall be considered NOT the
co-owner’s share of consideration. In case of joint purchase, the entire consideration shall be
considered and each person shall deduct TDS.
16. For a resident, income earned in and outside India shall be taxable.
17. Challans
a) Challan No. ITNS 280- Online payment of tax liability
b) Challan No. ITNS 281- TDS/TCS
c) Challan No. ITNS 282- Payment of gift tax, wealth tax, expenditure tax, estate duty, STT and
other direct taxes
d) Challan No. ITNS 283- Payment of Banking Cash Transaction Tax and Fringe Benefit Tax
18. In order to check whether the self-assessment tax paid by an assessee by way of depositing
challan in the bank has been received by the Government as taxes or not-
a) Check “Challan Status Enquiry” on the NSDL Website
b) Examine Form 26AS by logging into the e-filing account
19. Amount received from insurance company under keyman insurance policy consequent to the
demise of its partner shall be fully taxable in the hands of the firm. The amount of premium paid
by the partnership firm shall be claimed as a deduction u/s 37.
20. The factors taken into account while selecting deemed let out property are as follows-
a) Municipal taxes paid during the PY
b) Interest on loan taken for the house property
c) Rent of similar house property in same location

Principal loan repayment of loan taken for the house property during the PY need not be
considered.

21. TDS for rental payment u/s 194I if the deductee is resident and u/s 195 if the deductee is a
resident.
22. Payment to a hotel or restaurant against a bill or bills at any one time in cash of an amount
exceeding Rs. 50,000 -Submission of PAN is mandatory.
23. PAN is required to be submitted for sales or purchase of immovable property were the amount
exceeds Rs. 10,00,000 or valued by the stamp valuation authority referred to in Section 50C at
an amount exceeding Rs. 10,00,000.
24. The maximum deduction that can be claimed under Section 80DD of the Income tax Act will vary
based on the disability of the dependent.
a) Dependent who has minimum of 40% of certain disability is regarded as a person with
disability and the individual who incurs costs on medical expenses of such a dependent can
claim a maximum deduction of Rs. 75,000.
b) Dependent who has minimum of 80% of certain disability is regarded as a person with
severe disability and the individual who incurs costs on medical expenses of such a
dependent can claim a maximum deduction of Rs. 1,25,000.
25. No TDS needs to be deducted at source on salary or interest on capital paid to resident partners
falling within the limits specified u/s 40 (b).
26. Payment of advance tax for presumptive income-
a) Income from business covered u/s 44AD- Whole amount of advance tax on or before March
15 of the PY
b) Income from professions covered u/s 44ADA- Whole amount of advance tax on or before
March 15 of the PY
c) Income from the business of plying, leasing or hiring of goods carriages not owning more
than 10 goods vehicles at any time during the year- No concession for payment of advance
tax
27. In respect of any payment made to a person located in Notified Jurisdictional Area (NJA), tax is
deductible at higher of the rate specified in the Income Tax 1961 or rates in force as per latest
Finance Act or 30%.
28. Under Section 206C, seller has to collect Tax at Source (TCS) at the rate of 1% from purchaser for
the following items-
 a) Sale of any goods other than jewellery or bullion in cash of more than Rs. 2 lakhs.
b) Providing any services whose receipt in cash exceeding Rs. 2 lakhs other than those on
which TDS is deducted
c) Sale in cash of bullion exceeding Rs. 2 lakhs and jewellery exceeding Rs. 5 lakhs
d) Sale of motor vehicles exceeding Rs. 10 lakhs in cash or any other mode.

If the sales consideration of more than Rs. 2 lakhs is partly received in cash and partly in cheque
and cash receipts in less than Rs. 2 lakhs, then NO TCS is required to be collected.

TCS is collected @ 1% only on the cash component and not on the whole of sales consideration.

Only retail sale is covered not to sale by manufacturers to dealers/distributors.

All motor vehicles are covered whether it is a car or any other vehicle and the provisions of TCS
on sale of motor vehicle exceeding Rs. 10 lakhs is not dependent on the mode of payment.

29. An individual who gifts property to his spouse or minor child will be treated as deemed owner of
that property.
30. Clubbing of income will apply in accordance with Section 64 for the transfer of asset directly or
indirectly to son’s wife for inadequate consideration.
31. Sale or purchase of a motor vehicle other than two wheeled vehicles requires submission of PAN
irrespective of the value of transaction.
32. Payment as life insurance premium to an insurer requires submission of PAN where the amount
aggregates to more than Rs. 50,000 in a financial year.
33. Every person satisfying the following conditions should apply to Assessing Office for the
allotment of PAN-
a) Total income exceeds the maximum amount not chargeable to income tax
b) Carrying on any business or profession whose total sales, turnover, or gross receipts are or is
likely to exceeds Rs. 5 lakhs in PY
c) Required to furnish return of income u/s 139 (4A)
d) Being a resident other than an individual who enters into a financial transaction of an
amount aggregating Rs. 2,50,000 or more in a financial year.
e) Managing director, director, partner, trustee, author, founder, karta, CEO, principal office or
office bearer of d)
34. Forms for application for allotment of PAN
a) Residents- Form 49A
b) Individuals not being a Citizen of India/Entities incorporated outside India/Unincorporated
entities formed outside India- Form 49AA
35. Even if the assessee has not opposed during the proceedings of an assessment and order has
been passed by Assessing Office, he can file an appeal before CIT (Appeals) or move a revision
petition before Principal Commissioner or Commission of Income Tax u/s 264. However, revision
appeal can be opted for only if the time limit for filing appeal has expired, unless the assessee
has waived his right to appeal.
36. Alternate Minimum Tax
AMT is not applicable if the assessee is a corporate assessee and the assessee is an individual,
HUF, AOP, BOI (whether incorporated or not), Artificial Judicial Person and its adjusted total
income does not exceed Rs. 20 lakhs.
 The provisions of AMT will apply to every non-corporate tax payer who has claimed deduction
u/s 35AD.
Every non-corporate tax payer to whom the provisions o AMT apply is required to obtain a
report from a CA in form 29C on or before the due date of filing ROI.
AMT provisions are not applicable on an individual opting for the beneficial provision u/s
115BAC.
37. An individual is qualified as a resident of India if he satisfies either of the following conditions-
a) Stay in India for at least 182 days in a financial year, OR
b) Stay in India for at least 60 days during a FY and at least 365 days during the 4 preceding FYs.

Relaxation is provided to an Indian citizen or a Person of Indian origin who being outside India
comes on a visit to India by providing an extended period of 120 days for those having total
income other than income from foreign sources exceeding Rs. 15 lakhs during the FY.

38. Person who is a citizen of India/ person of Indian origin, being outside India, comes on a visit to
India shall be considered as Resident and Non-Resident who fulfils the following conditions
cumulatively-
a) Total income other than the foreign income of more than Rs 15 lakhs, AND
b) Stay in India for a period of 120 days or more but less than 182 days in the previous year,
AND
c) Stay in India for a period of 365 days or more in 4 years preceding the previous year.
39. An individual being a citizen of India having total income, other than the income from foreign
sources exceeding Rs. 15 lakhs during the PY shall be deemed to be resident and not ordinarily
resident in India in that year, if he is not liable to tax in any other country or territory by reason
of his domicile or residence or any other criteria of similar nature.
40. Section 54G- EXEMPTION OF CAPITAL GAINS FOR SHIFTING OF INDUSTRIAL UNDERTAKING
FROM URBAN AREAS TO ANY AREA OTHER THAN URBAN AREA
There should be transfer of machinery, plant, building or land or any right in land or building
used for business of an industrial undertaking situated in urban area which has been transferred
on account of such shifting of industrial undertaking from urban area to any area other than
urban area.
The capital gain should be utilised for the following purpose within 1 year before or 3 years after
the date of transfer (CGAS is applicable)-
a) Purchase of new plant and machinery for the purposes of business of the industrial
undertaking in the area in which the said undertaking is shifted.
b) Acquisition of building or land or construction of building for the purposes of his business in
the said area.
c) Expenses on shifting of the industrial undertaking from the urban area to the other area.

Quantum of exemption is the cost of new assets plus expenses incurred for the specified
purpose to the extent of capital gains.

Lock in period is 3 years from date of purchase or construction for the transfer of the new asset

41. Section 10(10CC)- Tax paid by the employer on the income in the nature of non-monetary
perquisite, at the option of the employer, on behalf of the employee shall be exempt.
 42. Advancing of loans or repayment of the principal amount of the loan do not constitute
expenditure deductible in computing the taxable income. However, interest payments made in
contravention of provisions of 40A(3) are disallowable, as interest is a deductible expenditure.
43. 40A(3) disallowance applies only to the payments which are allowed as a deduction in
computing income under the head “PGBP” and hence payment in cash for purchase of plant &
machinery, and other capital goods are not covered u/s 40A(3).
44. 40A(3) is not applicable if tax payer is opting for presumptive taxation scheme u/s 44AD.

Questions
Question 1

Mr. A is a salaried employee who is working in a multinational company. Mr. A has taken a residential
accommodation on rent from Mr. B who is non-resident in India. During the PY 2019-20 relevant to AY
20-21, Mr. A has paid monthly rent of Rs. 75,000 p.m. to Mr. B. Mr. A is not having any income other
than salary income. Determine whether Mr. A is under obligation to deduct TDS as per the provisions
of IT Act 1961 and under which section.

TDS shall be deducted u/s 195 since the deductee is a non-resident. If the deductee being Mr. B was a
resident, TDS u/s 194I.

Question 2

Mr. A is planning to enjoy his summer vacation in Goa and is considering booking rooms in a hotel. He
has booked two rooms, one for his brother and one for himself and the room charges for the entire
period is Rs. 75,000 equally divided between both of them. However, the payment to the hotel is to
be made by Mr. A and he will make the payment in cash. Mr. A has enquired whether he needs to give
copy of PAN while making payment of hotel. Whether PAN needs to be submitted?

Yes, copy of PAN is required to be furnished since payment has been made to hotel against bill or bills at
any time in cash for an amount exceeding Rs. 50,000. In the given case, Rs. 75,000 was paid by Mr. A in
cash to the hotel.

Question 3

Mr. A is planning to invest in bonds to be issued by RBI for Rs. 99,000 in June 2019. Determine
whether Mr. A is required to furnish a copy of PAN while acquiring bonds to be issued by RBI.

Yes, as the payment exceeds Rs. 50,000.

Question 4

M/s PQR Ltd is planning to purchase immovable property worth Rs. 29,00,000. The company has
asked you to determine the requirement for furnishing of PAN. Whether PAN is to be submitted?

Yes, PAN is required to be submitted since the amount of purchase of immovable property exceeds Rs.
10,00,000.

Question 5
Aakash HUF, a resident HUF has incurred Rs. 22,000 for medical treatment of Mrs. Aarti, Aakash’s
wife, who is a person with disability and has deposited Rs. 30,000 with LIC for her maintenance. For
AY 2020-21, HUF would be eligible for deduction of an amount equal to what?

Rs. 75,000

Question 6

Mr. Dinesh owns 8 light vehicles and declares profit on presumptive basis under Section 44AE for AY
2020-21. Will liability of payment of advance tax arise and when will it be payable?

He is liable to pay advance tax in four instalments in June, September, December and March since the
concession of payment of advance tax does not apply to income covered under Section 44AE.

Question 7

A motor car of the value of Rs. 15,00,000 was sold by a dealer to a customer in February 2020. Rs.
9,00,000 was received in cash and the balance by account payee cheque. Whether TCS to be
collected? At what rate and on what amount?

TCS @ 1% on Rs. 15,00,000 since the sale of motor car exceeds Rs. 10,00,000 in cash or any other mode.

Question 8

Mr. Jindal gifted a house property to his wife, Ms. Tina and a flat to his daughter-in-law Ms. Trisha.
Both of the properties were let out. Which of the following statements are correct?

a) Income from both properties are to be included in the hands of Mr. Jindal by virtue of Section
64.
b) Income from property gifted to wife alone is to be included in his hands by virtue of Section
64.
c) Mr. Jindal is the deemed owner of house property gifted to Ms. Tina and Ms. Trisha.
d) Mr. Jindal is the deemed owner of property gifted to Ms. Tina. Income from property gifted to
Ms. Trisha would be included in his hands by virtue of Section 64.

Answer is d)

Question 9

Mr. Sameer has gone to buy Honda Activa and vendor quoted the price of Honda Activa Rs. 40,000.
What is the threshold for furnishing of PAN on purchase of two vehicles?

No need to furnish PAN since it is purchase of a two wheeler.

Question 10

Mr. Kapil Khurana has purchased Life Insurance Policy, the premium of which is Rs. 12,000 p.a.
Whether PAN is required to be furnished to the insurer company on the said transaction?

No, since the annual premium on life insurance policy to the insurer company does not exceed Rs.
50,000.
Question 11

An individual client has consulted you on the matter of PAN. He is carrying on the business of sale and
purchase of garments. His turnover is Rs 3,00,000 and the profit is Rs. 75,000 for PY 2019-20. What is
the threshold of turnover exceeding which he has to apply for PAN?

Rs. 5,00,000

Question 12

Mr. A is not a citizen of India. He wants to apply for PAN in India. What is the applicable form for
application of PAN?

Form 49AA

Question 13

Can notional interest on security deposit given to the landlord in respect of residential premises take
on rent by the employer and provided to the employee be included in the perquisite value of rent free
accommodation given to the employee?

As per Rule 3 of the Income Tax Rules, the perquisite value of the residential accommodation provided
by the employer shall be the actual amount of lease rent paid or payable by the employer or 15% of
salary whichever is lower as reduced by the rent if any actually paid by the employee. There is concept
of determination of the fair rental value for the purpose of ascertaining the perquisite value of the rent
free accommodation provided to the employees. Notional interest on security deposit shall not be
considered.

Question 14

MNJ Pvt Ltd provided the following information for calculation of perquisite value of company leased
accommodation for one of its employee Mr. Z for AY 20-21:

Rent paid to landlord – Rs. 35,000 p.m.

Interest free refundable security deposit- Rs. 1,80,000

15% salary of Mr. Z (computed)- Rs. 36,325 p.m.

Notional interest rate- 10% p.a. (return that might have been earned if the amount of security deposit
was invested)

What will be the treatment of notional interest? Determine the value of perquisite for company
leased accommodation for Mr. Z for AY 20-21.

Notional interest shall not be considered. Perquisite value for company lease accommodation for Mr. Z
for AY 20-21 shall be lower of

Rent payable to landlord = Rs. 35,000 * 12 = Rs.4,20,000

15% of salary = Rs. 36,325 * 12 = Rs. 4,35,900

Hence, the value is Rs. 4,20,000

Question 15

Your client, Mr. Shah, did not oppose during the proceedings of scrutiny assessment. The Assessing
Officer passed the order with demand to be paid. Mr. Shah, however, now he feels that he missed to
report a major expenditure during the filing of return and proceedings. Assuming that he can act in
time limit, the remedial course available to him is to-

a) File an appeal before Commission of Income Tax (Appeals) under Section 246A (1)
b) Move a revision petition before the Principal Commissioner or Commissioner of Income Tax
under Section 264
c) Either of the above. However, revision option can be opted for only if time limit for filing
appeal has expired, unless Mr. Shah has waived his right of appeal.
d) He cannot opt for remedial course since he did not oppose during proceedings.

Answer is c)

Question 16

Total turnover of M/s Rajan & Traders, a partnership firm for PY 2018-19 was Rs. 89.7 lakhs. It is likely
to exceed Rs. 100 lakhs during PY 2019-20. Firm does not opt for presumptive taxation scheme. While
going through the books of accounts of PY 2019-20, no TDS was deducted on following-

a) Salary of Rs. 4,75,000 p.a. paid to manager

b) Professional fees of Rs. 48,000 paid to CA
c) Interest of Rs. 25,000 paid on loan taking from a banking company

Determine the disallowance attracted under Section 40(a)(ia).

Section 40(a)(ia)- 30% of the sum payable to a resident on which tax is deductible and such tax has not
been deducted or after deduction, has not been paid on or before the due date specified u/s 139(1).
However, where the assessee fails to deduct whole or any part of the tax but the assessee is not
deemed to be an assessee in default u/s 201, it shall be deemed that the assessee has deducted and
paid tax on such sum.

As per Section 201, where any person who is required to deduct TDS u/s 192 does not deduct or does
not pay after so deducting fails to pay, such person shall not be considered as assessee in default.
Hence, salary paid to manager without payment of TDS is not subject to disallowance u/s 40(a)(ia).

With regard to interest on loan paid to banking company, no TDS shall be deducted u/s 194A since the
amount does not exceed Rs. 40,000.

With regard to professional fees paid to CA, TDS shall be deductible u/s 194J since the amount exceeds
Rs. 30,000.

Hence disallowance u/s 40(a)(ia) is 48,000*30% i.e. Rs. 14,400.

Question 17

On 19-08-2019, Mr. Khera moved to Turkey for employment. His family accompanied him, owing to
long term nature of employment. Mrs. Khera is also planning to start a fashion boutique in Turkey
soon, once she gets settled. Both Mr. and Mrs. Khera are Indian citizens and have been working in
India for more than a decade now. Comment on their residential status for AY 20-21 assuming that
they did not visit India after August 2019.

A taxpayer would qualify as a resident in India, if he satisfies one of the following 2 conditions-

a) Stay in India for a year is 182 days or more

b) Stay in India in the immediately 4 preceding years is 365 days or more and 60 days or more in
the relevant financial year.

In the event of an individual who is a Citizen of India or a person of Indian origin leaves India for
employment during a FY, he will qualify as a resident of India only if he stays in India for 182 days or
more. In the given case, Mr. Khera being an Indian Citizen leaves India for the purpose of employment
and does not stay for 182 days or more in the PY, and hence he is a non-resident.

On the other hand, Mrs. Khera who accompanies her husband is a resident since she fulfils the second
condition. Hence, Mrs. Khera is a resident.

An individual will be resident and ordinarily resident if he meets both of the following conditions-

a) Has been a resident in India in at least 2 out of 10 immediately preceding years, AND
b) Has stayed in India for at least 730 days in 7 immediately preceding years.

Since the above two conditions are satisfied, Mrs. Khera is resident ordinary resident.

Question 18

Bill & Hill Pvt Ltd is bearing the taxes on perquisite for Ms. Lilly, their Production Head from Germany
for their newly set plant. In the initial years of run, the company foreseen losses with minimum
recovery. Also, Ms. Lilly’s India taxable income falls in the highest slab. On this arrangement of salary
and taxes, what should be the tax treatment of the taxes borne by the employer in Lilly’s tax
computation.

Only offer tax borne by the employer on monetary salary as perquisite in her tax computation. The tax
borne by the employer on the non-monetary salary as a perquisite shall be exempt u/s 10(10CC).

Question 19

Mr. Shahid, a wholesale supplier of dyes, provides you with the details of the following cash payments
he made throughout the year-

12-06-2019: Loan repayment of Rs. 27,000 taken for business purpose from his friend Kunal. The
repayment also includes interest of Rs. 5,000.

19-08-2019: Portable dye machinery purchased for Rs. 15,000. The payment was made in cash in three
weekly instalments.

26-01-2020: Payment of Rs. 10,000 made to electrician due to unforeseen electric circuit at shop.

28-02-2020: Purchases made from unregistered dealer for Rs. 13,500.

What will be the total disallowance u/s 40A(3)? What will be the disallowance u/s 40A(3) had Mr.
Shahid opt to declare his income u/s 44AD?
Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments
(which are deductible by way of expenditure while computing income under the head PGBP) made to a
person in day otherwise than by account payee cheque, account payee draft, electronic clearing system
through bank or prescribed modes of e-payment exceeds Rs. 10,000, no deduction shall be allowed in
respect of such expenditure.

a) 12-06-2019: Repayment of loan is not an expenditure which is allowed as an expenditure while

computing income under the head PGBP. Hence, 40A(3) disallowance is not applicable for loan
repayment of Rs. 25,000. Interest payment does not exceed Rs. 10,000 in cash and hence no
disallowance u/s 40A(3).
19-08-2019: No disallowance u/s 40A(3) for the payment for purchase of portable dye
machinery since it a capital expenditure not allowed as a deduction by way of expenditure while
computing income under the head “PGBP”.
26-01-2020: No disallowance u/s 40A(3) since the payment in cash does not exceed Rs. 10,000.
28-02-2020: Disallowance u/s 40A(3).
Total disallowance u/s 40A(3) = Rs. 13,500
b) 40A(3) is not applicable if tax payer is opting for presumptive taxation scheme u/s 44AD and
hence disallowance u/s 40A(3) shall be NIL.

Question 20

While computing advance tax liability for CGB Ltd for AY 20-21, which of the following is immaterial?

a) Turnover of the preceding previous year 2017-18

b) Losses declared in return, if any, in the preceding previous year 2018-19
c) Dividend declared in the preceding previous year 2018-19
d) Deduction under Chapter VI-A for the current year

Answer is c)

Question 21

For the PY 2019-20, the taxable income of Mr. Khurana (resident and aged 49 years) computed as per
the provisions of Income Tax Act is Rs. 30,40,000. The taxable income has been computed after
deduction of Rs. 3,00,000 under Section 80QQQB in respect of royalty on books. Will provisions of
Alternate Minimum Tax (AMT) apply to Mr. Khurana for AY 2020-21? What will be his tax liability for
the said AY assuming he has not opted for the provisions of Section 115BAC?

AMT provisions are applicable only to those non-corporate taxpayers having income under the head
“PGBP”.

Computation of tax liability

a) Tax liability as per the normal provisions of the IT Act- Normal tax liability= Tax on Rs.30,00,000
+cess @ 4% = (1,12,500 + 6,12,000) * 104% = Rs. 7,53,480
b) AMT computed @ 18.5% plus applicable surcharge and cess on adjusted total income = Rs.
(33,40,000 *18.5%)*104% = Rs. 6,42,616
Adjusted Total income = 30,40,000 + 3,00,000 = Rs. 33,40,000
Tax liability of the tax payer shall be higher of the above i.e. Rs. 7,53,480.
Question 22

On 26-05-2019, Z Ltd purchases its own shares (face value Rs. 10, amount offered to shareholders’: Rs.
90 per share). Total amount distributed by Z Ltd on buy back of 30,000 shares is Rs. 27,00,000. These
shares were issued in FY 2009-10 at a premium of Rs. 15. Mr. A is one of the shareholders. He holds
5,000 shares (cost of acquisition : Rs. 27 per share, year of acquisition 2011-12). He gets Rs. 4,50,000.
Determine the tax consequences in the hands of Z Ltd and Mr. A assuming that the shares of Z Ltd are
not listed.

Z Ltd shall be liable to pay additional income tax at the rate of 20% on distributed income and income of
Mr. A is exempt from tax by virtue of Section 10 (34A).

Question 23

Mr. Kapil Khurana is running an Utensil shop. Tax Liability of Mr. Kapil Khurana for the PY 2019-20 is
Rs. 51,400. He has paid advance tax of Rs. 49,000 till March 31, 2020. Balance tax of Rs. 2,400 is paid
by him at the time of filing the return of income on 31-07-2020 for AY 2020-21. Will he be liable to pay
interest under Section 234B?

No

Question 24

Mr. Amir has gross total income of Rs. 5,50,000 for PY 2019-20. During the PY 2018-19, Mr. Amir has
bought one commercial property which has given on rent and the income from house property is
included in total income of Mr. Amir. During the PY 2019-20, Mr. Amir has made repayment towards
the loan he took for purchase of property and the principal amount of repayment was Rs. 1,75,000.
Determine the amount of deduction eligible u/s 80C for AY 2020-21.

Principal repayment made towards home loan taken for purchase or construction of residential house
property shall be allowed as a deduction u/s 80C. In the given case, loan was taken for the purchase of
commercial property and hence has not been allowed as a deduction u/s 80C.

Question 25

Mr. X, a retailer, acquired furniture on 10-05-2019 for Rs. 10,000 in cash and on 15-05-2019 for Rs.
15,000 and Rs. 20,000 by a bearer cheque and account payee cheque, respectively. Determine the
depreciation allowable for AY 2020-21.

Actual cost shall exclude the amount paid in excess of Rs. 10,000 by any mode other than account payee
cheque, account payee draft, electronic clearing system through bank account or other prescribed
modes of payment.

Actual cost = Rs. 10,000 + Rs. 20,000 = Rs. 30,000

Depreciation = 30,000 * 10% = Rs. 3,000

Question 26

Alpha’s total income of AY 2020-21 has increased by Rs. 34 lakhs due to the application of arm’s
length price by the Assessing Office on transactions of purchase of goods from its foreign holding
company in respect of retail trade business carried on by it and the same has been accepted by Alpha
Ltd then-

a) Deductions under Chapter VI-A cannot be claimed in respect of the enhanced income
b) Business loss of AY 2016-17 cannot be set off against the enhanced income
c) Unabsorbed depreciation of AY 2010-11 cannot be set off against the enhanced income
d) None of the above can be claimed or set off against the enhanced income

Answer is a).

FINANCIAL REPORTING
Notes
1) Forfeited shares will form part of Share Capital as per Schedule III to the Companies Act 2013
not Share Options Outstanding Account.
2) If the turnover is less than Rs. 100 crores, rounding off to the nearest hundreds, thousands,
lakhs or million, or decimals thereof.
3) If the turnover is Rs. 100 crores or more, rounding off to the nearest lakhs, millions or crores or
decimals thereof
4) As per Section 462 of the Companies Act 2013, the Financial Statement of a start-up private
company may not include cash flow statement for the FY.
5) When an impairment loss occurs, the carrying amount of the asset shall be reduced to its
recoverable amount.
6) Segment reporting does not include gains on sale of investments unless the operations of the
segment are primarily of financial nature. It includes the following-
a) Portion of enterprise revenue that is directly attributable to the segment
b) Revenue from transactions with other segments of the enterprise.
c) Relevant portion of the enterprise revenue that can be allocated on a reasonable basis to a
segment.
7) In an operating lease, the lessee should recognise the benefit of incentives as a reduction of
rental expense over the lease term on a straight line basis.
8) An entity should present each financial statement with equal prominence.
9) A Non-cancellable lease is a lease that is cancellable only-
a) Upon occurrence of some remote contingency
b) With the permission of the lessor
c) If the lessee enters into a new lease for the same or an equivalent asset with the same
lessor, (If for a different asset, condition is not satisfied) OR
d) Upon payment by the lessee of such an additional amount that, at the inception of the
lease, continuation of the lease is reasonably certain.
10) As per AS 10 PPE, enterprise holding investment properties should value investment property
under cost model.
11) As per AS 17, reportable segments are those whose total revenue from external sales and inter-
segment sales is 10% or more of the total revenue of all segments.
12) As per AS 20, information regarding basic and diluted EPS is to be disclosed on the face of
Statement of Profit and Loss.
13) A company may issue fully paid up bonus shares to its members, out of free reserves, securities
premium account or capital redemption reserve account. No issue of bonus shares shall be
made by capitalising the reserves created by the revaluation of assets.
14) Debit or credit balance of “Foreign Currency Monetary Item Translation Difference account” is
shown under “Reserves and Surplus” as a separate line item.
15) As per Schedule III to the Companies Act 2013, money received against share warrant should be
classified in Balance Sheet under “Shareholders’ funds”.
16) Ratio analysis between direct cost and payroll expense is not one of the procedures performed
while checking the payroll expense.
17) Materiality is not a consideration for bank reconciliation. Differences should be inquired and
tested.
18) When bank allows interest, balance as per pass book shall be more than balance as per cash
book. When bank charges interest, balance as per cash book shall be more than balance as per
pass book.
19) As per SA 230, “Audit Documentation”, the auditor need not include in audit documentation
superseded drafts of working papers and financial statements, notes that reflect incomplete or
preliminary thinking, previous copies of documents corrected for typographical or other errors
and duplicates of documents.
20) Inventory items that are small in size but of high value or in high demand is an example of fraud
risk factor related to misstatements arising from misappropriation of assets. The following are
examples of risk factors related to misstatements arising from fraudulent financial reporting-
a) Known history of violation of laws and regulations
b) Management failing to remedy known significant deficiencies in internal control on a timely
basis.
c) Interest by management in employing inappropriate means to minimise the reported
earnings for tax motivated reasons
21) While vouching legal and professional expenses, the auditor should be cautious as the same may
highlight a dispute for which the entity may not have made any provision and the matter may
also not have been highlighted/discussed to the auditor for his specific consideration.
22) Clauses of the memorandum of association are as follows
1. Name clause
2. Registered office clause
3. Object Clause
4. Liability Clause
5. Capital Clause
6. Association clause
7. OPC Clause
23) As per INDAS 108 “Operating Segment”, if a financial statement contains both the consolidated
financials of a parent as well as parent’s separate financial statements, segment information is
required only for consolidated financial statements.
24) Commission on reinsurance ceded appears as an income in the revenue account.
25) As per INDAS 37 “Provisions, Contingent Liabilities and Contingent Assets”, warranty claims
normally generate provision.
26) As per INDAS 105 “Non Current Assets held for sale and discontinued operations”, Finance cost
is not allowed as cost to sell. Auctioneers’ commission, advertisements and legal fees for
drafting contract of sale are allowed.
27) Useful life of an intangible asset with a finite useful life should be reviewed every year as per
INDAS 38.
28) As per INDAS 23 “Borrowing Costs”, when activities to prepare an asset for its sale or use are
suspended, borrowing costs must be expensed.
29) The company shall not send the confirmation letters to the bank seeking their confirmation on
the bank balances. As per SA 505 “External Confirmations”, it is stated that “When performing
confirmation procedures, the auditor should maintains control over the process of selecting
those to whom a request will be sent, the preparation and sending of confirmation requests and
the response to those requests”.
30) Tax rate of the CY will be used for the measurement of DTA and DTL not the tax rate in the PY or
expected tax rate in the future.
31) The carrying amount of DTA and DTL may change even though there is no change in the amount
of related temporary differences on account of the following reasons-
a) Change in tax rates or tax laws
b) Reassessment of recoverability of DTA
c) Change in the expected manner of recovery of asset
32) A company to present condensed interim financial statement for 6 months period 30 th
September 2017, would have a comparative balance sheet as on 31 March 2017.
33) A company to present condensed interim financial statements for the quarter ended June 30,
2017 would have a comparative statement of profit and loss for quarter ended June 30, 2016.
34) Date of approval of the financial statement by the Board shall be the date on which the
company authorises the financial statements for issue not the date on which the management
authorises the financial statement for issue to the Board.
35) Any director who intends to participate in the meeting through electronic mode may intimate
about such participation at the beginning of the calendar year and such declaration shall be valid
for one year.
36) The following class of companies shall appoint at least on woman director-
a) Every listed company
b) Every other public company having
(i) Paid up share capital of Rs. 100 crores or more, OR
(ii) Turnover of Rs. 300 crores or more.
37) OPC- One member and one director
38) Private Company- two members and two directors
39) Public company- Minimum 7 persons for formation of public company though requirement of
minimum directors shall remain 3.
40) Only a natural person who is an Indian citizen and resident in India shall be eligible to act as a
member and nominee of an OPC. Name of the nominee should be mentioned in Memorandum
of Association
41) For having significant influence to become associate company, the person must control at least
20% of the total voting power of the other company.
42) An application shall be made by a registered proprietor of a trademark that the name is identical
with or too nearly resembles to a registered trademark of such proprietor under Trademarks Act
1999 made to the Central Government within 3 years. The Central Government shall direct the
company to change its name within a period of 6 months from the issue of such direction after
adopting an ordinary resolution for the same. Where the Central Government opines that the
name is too identical or resembles the name by which a company in existence is previously
registered, it may director the company to change its name within a period of 3 months from
the date of issue of such director by adopting an ordinary resolution for the purpose.
43) The auditor shall express an adverse opinion when the auditor having obtained sufficient
appropriate audit evidence concludes that the misstatements individually or in aggregate are
both material and pervasive to the financial statements.
44) The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient appropriate
audit evidence on which to base the opinion and the auditor concludes that the possible effects
on the financials statements of undetected misstatements if any could be both material and
pervasive.
45) Goodwill is of intangible nature which either arises on acquisition or is internally generated.
Internally generated goodwill is not recognised as an asset because it is not an identifiable
resource controlled by the enterprise that can be measured reliably at cost. However, if the item
is acquired in a business combination, it forms part of the goodwill to be recognised at the date
of amalgamation.
46) Companies (Auditor’s Report) Order 2016 issued u/s 143 (11) of the Companies Act 2013 is not
applicable for the following classes of companies-
a) Banking company
b) Insurance company
c) Section 8 company (charitable object)
d) OPC
e) Small company- Other than a public company whose paid up share capital does not exceed
Rs. 5 crores and turnover as per its last profit and loss account does not exceed Rs. 20
crores.
f) Private companies of the following types-
a) Private company which is not a holding or subsidiary company of a public company, AND
b) Private company with a paid up share capital and reserves & surplus not more than Rs. 1
crore on the Balance Sheet date, AND
Unpaid calls and share application money pending allotment shall not be considered
in the above Rs. 1 crores.
c) Private company which does have total borrowings exceeding Rs. 1 crores from any
bank and financial institution at any point of time during the financial year, AND
d) Private company which does not have total revenue exceeding Rs. 10 crores during the
financial year.
47) As per SA 705 “Modifications to the Opinion of Independent Auditors’ Report”, when the
auditor expresses a qualified opinion, it would not be appropriate to use phrases such as “with
foregoing explanation” or “subject to”, in the Opinion Section as these are not sufficiently clear
 or forceful. When the auditor expresses a qualified opinion due to a material misstatement in
the financial statements, the auditor shall state that, in the auditors’ opinion, except for the
effects of the matters described in the “Basis for Qualified Opinion” section, the accompanying
financial statements present fairly in all material respects (or give a true and fair view of) […] in
accordance with [applicable financial reporting framework].
48) Detection risk is the risk that the procedures performed by the auditor to reduce the audit risk
to an acceptably low level will not detect a misstatement that exists and could be material
either individually or when aggregated with other misstatements.
49) Relative defined as per Companies Act 2013-
a) Spouse
b) Father including step father
c) Mother including step-mother
d) Son including step-son
e) Son’s wife
f) Daughter
g) Daughter’s husband
h) Brother includes step-brother
i) Sister includes step-sister
50) Section 144 of the Companies Act 2013 provides that the auditor, being an individual either
himself or his relative shall not render the following services to the company, or its holding
company or subsidiary company-
a) Accounting and book keeping services
b) Internal audit
c) Design and implementation of any financial information system
d) Actuarial services
e) Investment advisory services
f) Investment banking services
g) Management services
h) Rendering of outsourced financial services.
51) SA 701 is mandatory in case of audit of listed entities, and according to the same, if the auditor
has determined that there are no key audit matters to communicate, the auditor shall state
under “Key Audit Matters” para that “except for the matter described in the Basis for Qualified
(Adverse) Opinion section, we have determined that there are no [other] key audit matters to
communicate in our report”.
52) While vouching for interest income from fixed deposits, the auditor may obtain a copy of Form
26AS (TDS Withholding by the bank/financial institution) and reconcile the interest reflected
therein to the income recognised.
53) Form No. CA 1- Form of Appeal to the Commissioner (Appeals) under Customs Act
54) Form No. CAA 1- Creditors’ Responsibility Statement
55) In order to obtain sufficient appropriate audit evidence regarding the existence and condition of
inventory lying on consignment, confirmations to the quantity and condition of inventory held
by the third party on behalf of the entity and attend third party’s physical counting of inventory.
56) Whereby any provision contained in this Act or articles of the company, special note is required
of any resolution, notice of the intention to move such resolution shall be given to the company
 by such number of members holding not less than 1% of the total voting power or holding share
on which such aggregate amount not exceeding Rs. 5,00,000.
57) A general meeting of the company may be called by giving not less than 21 days’ notice either in
writing or through electronic mode. The general meeting may be called after giving shorter
notice if consent in writing or by electronic mode-
a) AGM- not less than 95% of the members entitled to vote
b) Any other meeting-
(i) Company having share capital- not less than 95% of the paid up equity share capital
of the company
(ii) Company not having share capital- not less than 95% of the total voting power
exercisable at that meeting.

Questions
Question 1

A Ltd sold machinery having WDV of Rs. 40 lakhs to B Ltd for Rs. 50 lakhs (Fair value Rs. 50 lakhs) and
same machinery was leased back by B Ltd to A Ltd. The lease back is in nature of operating lease. The
treatment will be

a) A Ltd should amortise the profit of Rs. 10 lakhs over lease term.
b) A Ltd should recognise the profit of Rs. 10 lakhs immediately.
c) A Ltd should defer the profit of Rs. 10 lakhs.
d) No profit should be recognised by A Ltd.

Answer is b)

Question 2

If the turnover of the company is Rs. 100 crores, then the figures appearing in the financial statements
may be rounded off to

a) Nearest hundreds
b) Nearest thousands
c) Nearest lakhs
d) Not rounded off at all.

Answer is c). If the turnover is in crores, it may be rounded off to the nearest lakhs, millions or crores.

Question 3

Yash Ltd wants to prepare its cash flow statement. It sold equipment of book value of Rs. 60,000 at a
gain of Rs. 8,000. The amount to be reported in its cash flow statement under operating activities is-

a) Nil
b) (8,000)
c) 8,000
d) 60,000

Answer is a).
Question 4

The cost of internally generated intangible asset does not include-

a) Expenditure on training the staff to operate the asset.

b) Salaries of personnel directly engaged in generating the asset
c) Materials consumed in generating the intangible asset
d) Fees to register a legal right

Answer is a).

Question 5

A non-cancellable lease cannot be cancelled

a) Upon the occurrence of any contingency

b) With the permission of the lessor
c) On the request of the lessee upon payment of an additional amount
d) If the lessee enters into a new lease for different asset with the same lessor

Answer is d).

Question 6

Which item of inventory is under the scope of AS 2?

a) WIP arising from construction contracts

b) Raw Materials
c) Shares, debentures held as stock in trade
d) Inventory of livestock, agricultural produce and forest products

Answer is b)

Question 7

Which account cannot be used for issue of bonus shares as per Companies Act?

a) Securities Premium account

b) Revaluation Reserve
c) Capital Redemption Reserve
d) General Reserve

Answer is b).

Question 8

An asset bought for Rs. 12,00,000 having a carrying value of Rs. 10,00,000. It can be sold in the market
for Rs. 9,50,000. Similar asset with newer technology can be purchased from the market for Rs.
15,00,000. The fair value of the asset will be-

a) Rs. 15,00,000
b) Rs. 12,00,000
 c) Rs. 10,00,000
d) Rs. 9,50,000

Answer is d).

Question 9

As per AS 3, cash flow should be reported on net basis in the case of-

a) Entities engaged in trading activities

b) Funds held for customers by an investment enterprise
c) Entities engaged in stock broking business
d) Company which is subsidiary of another company

Answer is b)

Question 10

A company is being sued but no court judgement or legal settlement has been reached. At present,
the company has no obligation to pay but in future 20% cash outflow of the sued amount may occur.
The company will account for it as a

a) Provision
b) Contingent Liability
c) Contingent Asset
d) Disclosure only

Answer is a)

Question 11

A company is into manufacturing of goods. Every month the company values the goods as per FIFO
method. While considering the costs required to be loaded on the finished goods, the following are
considered as part of the cost of goods-

1. Raw Material
2. Freight cost
3. Marketing cost
4. Depreciation of plant and machinery

What should be considered in calculation of cost of goods as per AS 2?

a) 1, 2 and 3
b) 1, 2, 3 and 4
c) 1, 2, and 4
d) Any of the above

Answer is c)

Question 12
X is performing the audit procedure for provision of expenses made at the year end. The client
provides the list of open purchase orders along with the amount and mentions that based on the best
estimate, they have created provision of 50% against all these open purchase orders. X validates the
open PO list and took the 50% estimate to the Management Representation Letter. What is the most
appropriate option?

a) No action is required
b) X to perform sample testing of the PO along with the rationale of the management estimate
regarding 50%.
c) Take an appropriate management representation letter
d) Ask the client to reperform its working as it is unlikely that all POs are 50% complete and
perform the testing of these provisions.

Answer is d)

Question 13

X company took a premises on rental basis where the terms and conditions are rental per month Rs.
10,00,000 over a lease term of 5 years. Rent escalation every year is 12%. The company is doing the
accounting of rental expense considering the amount of payment made by the Company and
accordingly accruing the expense in the books of accounts. Out of the following options, what should
be done for accounting of rental expense?

a) Accounting done by the company is appropriate

b) The company should straight line the entire lease amount over the entire 5 years period and
book the rental expense for each year on equal basis.
c) Rental escalation should be accrued at the end of every year along with the rent expense
amount paid on monthly basis.
d) None of the above.

Answer is b)

Question 14

At the time of stock taking, the accountant noted that goods costing Rs. 1,000 (estimated future cost
of Rs. 1,600) are lying in the godown, waiting for dispatch. These goods were billed on 15 th March
2018 for Rs. 1,200. While calculating the value of physical inventory, the following adjustment will be
made in the value of inventory shown by the books of account for the year ended on 31-03-2018?

a) Exclude the goods from calculating inventory

b) Include the sales price of Rs. 1,200 in the value of inventory
c) Include the cost price of Rs. 1,000 in the value of inventory
d) Include the goods at estimated future cost of Rs. 1,600 in the value of inventory

Answer is c)

Question 15

On April 1, 2017, M/s Zero Bros had a provision for doubtful debts of Rs. 13,000. During 2017-18 Rs.
8,400 proved irrecoverable and it was desired to maintain the provision for doubtful debts @ 4% on
debtors which stood at Rs. 3,90,000 before writing off bad debts. Amount of net provision debited to
P&L account will be –

a) Rs. 15,600
b) Rs. 15,000
c) Rs. 10,664
d) Rs. 10,000

Answer is c)

Question 16

The management of Magoo Ltd has developed a strong internal control in its accounting system in
such a way that the work of one person is reviewed by another. Since no individual employees is
allowed to handle a task alone from the beginning to the end, the chances of early detection of frauds
and errors are high. CA Olive has been appointed as auditor of the company for current FY 2017-18.
Before starting the audit, she wants to evaluate the internal control system of Magoo Ltd. To facilitate
the accumulation of information necessary for proper review and evaluation of internal controls, CA
Olive decided to use internal control questionnaire to know and assimilate the system and evaluate
the same. Which of the following questions need not be framed under internal control questionnaire
relating to purchases?

a) Are authorised signatories for purchases limited to elected officials?

b) Are payments approved only on original invoices?
c) Does authorised officials thoroughly review the documents before signing cheques?
d) Are monthly bank reconciliations implemented for each and every bank accounts of the
company?

Answer is d). Question based on bank reconciliation is not related to purchases, thus, needs to be
framed under questionnaire relating to bank accounts of the company.

Question 17

In July 2018, M/s Tom & Co entered into an agreement with M/s Jerry & Co under which a machinery
would be let on hire and M/s Jerry & Co. would have the option to purchase the machinery in
accordance with the terms of the agreement. Thus, M/s Jerry & Co agreed to pay M/s Tom & Co, a
settled amount in periodical instalments. The property in the goods shall be passed to M/s Jerry & Co
on the payment of the last of such instalments. While checking such hire-purchase transaction, what
would the auditor examine?

a) That the periodical instalments paid are charged as an expenditure by M/s Jerry & Co.
b) That the hire purchase agreement specifies clearly the hire purchase price of the machinery to
which the agreement relates to
c) That M/s Tom & Co charges depreciation throughout the life of the machinery.
d) All of the above

Answer is b). The accounting treatment of instalments paid and charging of depreciation are wrong.
Question 18

With the shift in favour of formal internal controls in the management of affairs of Ben Ltd, the
possibilities of routine errors and frauds have greatly diminished and the auditor CA Nohara finds
extensive routine checking as nothing more than a ritual because it seldom reveals anything material.
Therefore, he decided to select the sample without following a structured technique. Although no
structured technique is used, CA Nohara would nonetheless avoid any conscious bias or predictability
and thus attempt to ensure that all items in the population have a chance of selection. What method
of sample selection is he following?

a) Simple random sampling

b) Systematic Sampling
c) Block Sampling
d) Haphazard sampling

Answer is d). Haphazard sampling is one of the sampling techniques in which the auditor selects the
sample without following a structured technique. Although no structured technique is used, the auditor
would nonetheless avoid any conscious bias or predictability (for example, avoiding difficult to locate
items or always choosing or avoiding the first or last entries on a page) and thus attempt to ensure that
all items in the population have a chance of selection.

Question 19

Mayur Textiles Private Limited was incorporated on 23rd October 2017. As per the compliance
requirement, Company shall hold its AGM within 9 months from the date of closure of financial year
and file financial statements with MCA within the due date. What is the due date for holding a Board
meeting for approval of financial statements?

a) September 30, 2018

b) December 30, 2018
c) December 31, 2018
d) March 31, 2019

Answer is c).

Question 20

X Event Management Company is in need of additional funds. They have already exhausted their limit
of authorised capital. In this case, you suggested them to increase authorised capital first and then
raise additional funds. Which MCA form to be filed for intimating increase in authorised capital?

SH-7

Question 21

Ms Noori and Mr. Vikas are two promoters who want to incorporate a Company limited by
Guarantee. Both will be subscribing 50-50 equity capital of the Company. Name has been approved by
the Ministry. Which table they have to adopt as a form of Memorandum of Association?

Table C
Question 22

You are a consultant of Nova Private Limited, a company under Incorporation. You are drafting MOA
and AOA of the Company. In Schedule I, forms have been specified for MOA & AOA. In MOA, amount
of share capital with which the company is to be registered has to be mentioned. As per Table A,
which clause number is capital clause?

5th clause

Question 23

Naman Ltd has taken a loan of USD 20,000 on 01-04-2017 for a specific project at an interest rate of
2.5% p.a. On 01-04-2017, the exchange rate between the currencies was Rs. 55 per USD. The exchange
rate as on 31-03-2018 was Rs. 49 per USD. The corresponding amount was borrowed by the company
in local currency at an interest rate of 5% as on 01-04-2017. What will be the increase/decrease in
liability towards the principal amount?

Decrease by Rs. 1,20,000 (only on account of restatement of closing loan amount)

Question 24

Nakul Ltd is a trading company from Jalna in Maharashtra and is in the business of purchasing tubro
machines and selling them in Madhya Pradesh, Mizoram and Meghalaya. The company has incurred
IGST on supply to other states. The business unit purchasing these machines are eligible to claim ITC.
Also, Nakul Ltd claims ITC for taxes paid on inward supplies. It also pays sales commissions to its
agents in those states to promote sales and is required to incur handling costs as well. Which of the
following costs will be included in cost of inventory?

a) GST
b) Handling costs
c) Sales commission

Only handling costs will be included in the cost of inventory.

Question 25

Veer Ltd manufactures cotton trousers and exports the products to various countries. The company
has valued its closing inventory of finished goods at realizable value, inclusive of profit and export
cash incentives. The ownership of these goods is yet to be passed to the buyers. How should the
closing inventory be valued? Should the export incentives be recorded at the time of export of at the
time of valuation of closing inventory?

The closing inventory should be valued at lower of cost or NRV and export incentives should be recorded
at the time of exports.

Question 26

Nihal Constructions undertook a construction contract of a dam for Rs. 200 crores on 22-12-2017. On
22-12-2018, the company found that it had already spent Rs. 175 crores on the construction. A
prudent estimate of additional cost of completion was Rs. 27 lakhs. When should the company
recognise the provision of expected loss?
 a) At the time of conclusion of contract
b) For the year ended on 31-03-2018
c) Not recognise
d) Proportionately recognise the expected loss when the loss becomes probable and the balance
shall be recognised at the time of conclusion of contract.

Answer is b).

Question 27

The statement of financial position of Fones & Co includes a material amount of Rs. 42,00,000 in
respect of costs capitalised in the year ended March 31, 2018 as development expenditure. The
auditor, Krishnan & Associates reviewed the relevant documentation related to this expenditure and
has concluded that these costs are research expenditure. CA Krishnan is discussing with the
management of Fones & Co since this will require adjustment to the financial statements of the
entity. If the auditor issues an unmodified opinion, which of the following is the correct adjustment
required?

a) The capitalised development expenditure of RS. 42,00,000 less any amortisation expenses
must be written off from the entity’s Balance sheet. Hence, adjustment to balance sheet only
would be sufficient to provide an unmodified opinion.
b) The correct research expenditure of Rs. 42,00,000 to be included in the expense for the year.
Hence, adjustment to profit and loss would be required.
c) Both balance sheet and profit & loss account to be adjusted with the expenditure of Rs.
42,00,000 for the year.
d) Neither the Balance Sheet nor the profit & loss account need any adjustment, since the
expenditure has already been recorded in one of the financial statements.

Answer is c).

Question 28

Morrison Clothing Co. manufactures high quality suits and dresses and has a year end March 31, 2018.
The audit fieldwork is almost completed, and the financial statements shown a draft PBT of Rs. 150
crores. Most of the revenue come from sales to expensive fashion boutiques in the country. However,
this year the company has for the first time made a small number of cash sales. The audit senior has
not been able to find any supporting documentation to substantiate the cash sales for the year. Which
of the following statements BEST describe the action the auditor should take in relation to cash sales
of Morrison?

a) Advise the finance director that they plan to express a qualified opinion due to material
misstatement.
b) Include the issue relating to cash sales in the report they issue to TCWG including audit
committee where relevant.
c) Discuss the likely amount of cash sales that will be generated in the next year with the
directors and compare the same with the CY cash sales.
d) Recommend a system of internal controls that Morrison should implement in relation to cash
sales.
Answer is b).

Question 29

As per INDAS 38, when should amortisation of intangible asset commence?

a) Expenditure is first incurred on that asset

b) Asset is available for use
c) Economic benefits start to realise from that asset
d) Reasonable time passes

Answer is b).

Question 30

A is required to perform testing of repairs and maintenance expense account. The company provided
him the GL Dump of the expense item and A decided to perform the following audit procedures-

 Vouching of expense account by matching of invoice with the amount captured in the GL
Dump
 Variation of expense between CY and PY
 Ensure the appropriate classification of expense in the right General Ledger.
 Reconcile the GL dump with the Trial Balance.

An external reviewer was entrusted to review the audit procedures done by the audit firm where in
he decided to perform the review of the work done by the audit team and picked work done for audit
of repairs and maintenance account. The reviewer identified the following gaps in the testing-

a) The work paper has not captured how the engagement team ensured the capital expenditure
has been debited to Profit & Loss account.
b) Appropriate deduction of withholding taxes while booking the amount in the books.
c) Any issue in the useful life of fixed assets if there is too much expenditure incurred on fixed
assets.
d) Whether expenditure was authorised and approved as well?

Which of the above procedures should have been performed by the engagement team while testing
repairs and maintenance expenses?

(i) A) and c)
(ii) All of the above
(iii) B) and d)
(iv) A), c) and d)

Answer is (ii). With respect to withholding tax, the engagement team could have performed the
procedures differently as well while reviewing the entire expense dump along with the TDS entries but
in this example, it has been assumed that the withholding taxes testing was performed in conjunction
with the testing of expense.
Question 31

An entity has losses in its operations and would need immediate cash to fund its operations. Hence, to
get immediate cash, it sold one of its properties appearing in the books at depreciated value of Rs.
8,50,000. The property is sold at a price of Rs. 8,00,000. However, the normal market price of the
same property is Rs. 10,00,000. What would be the fair value of the property as per INDAS 113?

Rs. 10,00,000

Question 32

PQR Ltd wants to make a change in the accounting policy which has been followed for the last 10
years. However, it is impracticable to find out the impact of change in policy for the last 10 years. The
maximum number of years for which the company can find out the impact practically is only the
current year. What should the company do in this case?

a) It can disclose the effect for the current year only in case of impracticability to find the impact
in the earlier years.
b) It has to give effect to current year and last comparative year, as the effect needs to be given
for the latest prior period presented also.
c) It can approximate the retrospective effect by doing a backward calculation in the light of
present information
d) It can apply the new policy prospectively from the start of the earliest period practicable.

Answer is a)

Question 33

ABC Ltd is in the process of finalisation of accounts for 2017-18. The financial statements for the year
ended March 31, 2018 has already been prepared but not yet approved. The accountant found that
there is a mistake in the accounts for the year 2014-15. Which of the following action would be right?

a) Rectify and change the accounts retrospectively from the year 2014-15.
b) Rectify the mistake retrospectively but incorporate the effect only in the opening balance of
assets, liability and equity for 2015-16.
c) Rectify the mistake retrospectively but incorporate the effect only in the opening balance of
the assets, liability and equity of 2017-18.
d) Rectify the mistake retrospectively but incorporate the effect only in the closing balance of
assets, liabilities and equity of 2017-18.

Answer is b)

Question 34

A Ltd has invested in debentures whose interest rate is floating in nature and as per the terms of the
instrument, interest will be reset every month. Terms of interest is 0.5 * (MIBOR + 2%). Classify the
financial asset and determine the subsequent measurement for the aforesaid instrument.

a) Financial asset measured through amortised cost

 b) Financial asset measured at Fair Value through Other Comprehensive Income (FVOCI) without
recycling
c) Financial asset measured at Fair Value Through Profit & Loss (FVTPL)
d) Financial asset measured at FVOCI with recycling

Answer is c).

Question 35

An entity has entered into a factoring arrangement with bank and accordingly sold all its debtors
without recourse arrangement. However, as per the bank policy, the company has guaranteed a bad
debt loss of 2%. Historically, the entity has had only 1% bad debt. What will be the treatment under
INDAS 109?

a) Debtors can be derecognised fully.

b) Debtors cannot be derecognised.
c) Debtors can be derecognised for 98% value.
d) Debtors cannot be derecognised to the extent of continuing involvement only.

Answer is b).

Question 36

Entity A has issued preference shares to the investors which has similar voting rights and dividend
rights and will be converted into one is to one equity shares at the time of IPO. As per the terms of the
agreement, if the IPO does not happen by the end of the 7 th year, then the Company will have to buy
back the shares from the investors. The company is growing very fast and is confident of going
through the IPO within 3 years itself. How will the company classify the above instrument in the
financial statement?

a) Equity
b) Liability
c) Hybrid
d) Compound

Answer is d).

Question 37

An entity has written a foreign currency call option. The aforesaid derivative was designated as a
hedge of the highly probable forecasted transaction. The aforesaid hedge:

a) Will qualify as cash flow hedge

b) Will quality as fair value hedge
c) Will qualify as net investment hedge
d) Is not permitted.

Answer is d).
Question 38

When can temporary differences arise?

a) Identifiable assets acquired and liabilities assumed in a business combination are recognised
at their fair values in accordance with INDAS 103 “Business Combinations” but no equivalent
adjustment is made for tax purposes.
b) Assets are revalued and no equivalent adjustment is made for tax purposes.
c) Goodwill arises in a business combination
d) All of the above

Answer is d)

Question 39

S Ltd is reviewing one of its business segments for impairment. The carrying value of its net assets is
Rs. 40 million. Management has produced two computations for the value in use of the business
segment. The first value of Rs. 36 million excludes the benefit to be derived from a future
reorganisation. The second value of Rs. 44 million includes the benefits to be derived from the future
reorganisation. There is not an active market for the sale of the business segments.

Whether the business segments need to be impaired and if yes, then what amount?

a) Yes, by Rs. 4 million.

b) Yes, by Rs. 8 million.
c) Yes, by Rs. 36 million
d) No

Answer is a).

Question 40

A Ltd has following assets in the Balance Sheet

(i) PPE of Rs. 5 crores

(ii) Brand with indefinite useful life of Rs. 10 crores
(iii) Trade receivables of Rs. 50 lakhs
(iv) Inventories of Rs. 80 lakhs

Which of the above assets are required to be tested for impairment at least on an annual basis
irrespective of whether there is an indication of impairment?

Only brand with useful life of Rs. 10 crores.

Question 41

P Ltd has a plant with the normal capacity to produce Rs. 5,00,000 unit of a product p.a. and the
expected fixed overhead is Rs. 15,00,000. Fixed overhead on the basis of normal capacity is Rs. 3 per
unit. However, the actual production is Rs. 3,75,000 units. What is the amount of fixed overheads to
be included in the cost of inventory?
 a) Rs. 15,00,000
b) Rs. 11,25,000
c) Rs. 3,75,000
d) Nil

Answer is b)

Question 42

Adrien is a foreign national residing in Nice, France. In the month of august 2018, he is visiting India
for the purpose of incorporating a private limited company along with his resident Indian friend
Aakaash. He want to know about a certain document which he is required to hold so that he may be
allowed to incorporate a company in India. Advise.

a) He should hold an affidavit duly certified by Embassy of India in France stating his intention to
incorporate a company in India.
b) He should hold a valid Business visa.
c) He should hold a valid Tourist-cum-Working visa.
d) He should hold a valid Conference visa.

Answer is a).

Question 43

A director of XYZ Pvt Ltd takes a loan from its company. Due to some reasons, he fails to repay the
debt within the given time period. He requests Board of Directors to give him time for repayment of
debt. Which of the following statements are correct in accordance with Companies Act 2013?

a) Power to fix time limit for repayment of any debt due from the director can be exercised only
by members by special resolution at a general meeting
b) Power to fix time limit for repayment of any debt due from director can be exercised by Board
of the company itself.
c) Power to fix the time limit for repayment of any debt due from director can be exercised with
the prior permission of the company in the general meeting while taking debt.
d) Board shall not exercise this power if the provision related to repayment of debt is contained
in the articles of the company.

Answer is b)

Question 44

Marvin Ltd is a renowned food chain supplier in a posh are providing restaurant facility along with
food delivering. CA Felix was appointed as an auditor of the company for the FY 2017-18. While
examining the books of accounts of the company, CA Felix came to know about one of the major
expenses of the company i.e. rent expense of Rs. 1,20,000 p.m. for which he applied substantive
analytical procedures for verification purpose.

a) CA Felix would inspect every single rent invoice per month of Rs. 1,20,000 and verify other
elements appropriately.
 b) CA Felix would compare the rental expense of the company with that of a nearby company
having corresponding dimensions for high degree of accuracy.
c) CA Felix would select the first month rent invoice of Rs. 1,20,000 and appropriately verifying
other elements would predict that the rent for the whole year would be Rs. 14,40,000.
Thereafter, he would compare the actuals with his prediction and follow-up for any
fluctuations.
d) A) and b) both

Answer is c).

As per SA 520 “Analytical Procedures”, substantive analytical procedures are generally more applicable
in case of large volumes of transaction that tend to be predictable over time. Analytical procedures
involving for example, the prediction of total rental income on a building divided into apartment, taking
the rental rates, the number of apartments and the vacancy rates into consideration, can provide
persuasive evidence and may eliminate the need for further verification by means of test of details,
provided the elements are appropriately verified.

Question 45

Minnie Ltd, a listed company appointed CA Kranny for auditing complete set of consolidated financial
statements of the company. CA Kranny is unable to obtain sufficient appropriate audit evidence
regarding an investment in a foreign associate. The possible effects of the inability to obtain sufficient
appropriate audit evidence are deemed to be material but not pervasive to the consolidated financial
statements. Based on the audit evidence obtained, CA Kranny concludes that a material uncertainty
does not exist related to the events or conditions that may cast a significant doubt on the company’s
ability to continue as a going concern in accordance with SA 570. State what type of opinion CA
Kranny must have provided in the given scenario.

a) Unmodified opinion
b) Qualified Opinion
c) Adverse Opinion
d) Disclaimer of opinion

Answer is b). As per SA 705 “Modifications to the opinion in an independent auditors’ report”, the
auditor shall express a qualified opinion when the auditor is unable to obtain sufficient appropriate audit
evidence on which to base the opinion, or where the auditor has obtained sufficient appropriate audit
evidence but the auditor concludes that the possible effects on the financial statements of undetected
misstatements, if any could be material but not pervasive.

Question 46

Oasis Water Solutions Limited have finalised an arrangement with its members. To initiate the
process, Company has to make an application to Tribunal. A creditors’ responsibility statement is a
mandatory attachment for that application. What is the format to be used?

Form No. CAA 1

Question 47
You are a consultant of Omega Watches Private Limited, subsidiary of Omega SA, Swiss Company.
Omega Watches Private Limited have three shareholders based in Switzerland and one resident
shareholder based in India. All shareholders are directors of the Company. Board has started
maintaining register of members in Switzerland. As their consultant, you have to make sure relevant
compliance requirements are being fulfilled. Within how many days, Registrar has to receive
intimation of such foreign register being maintained in Switzerland?

30 days

Question 48

You are part of the internal audit team appointed for QRS Bank Ltd for the financial year 2017-18 and
your senior has instructed you to verify the cash vouchers for the quarter ending September 30, 2017
of a branch located in Mumbai. While verification, you noticed that most of the vouchers have been
signed by the teller only i.e. the official responsible for cash receipts and payments over the counter,
however in the system they have been authorised by one more official. As an internal auditor you
should-

a) Report the matter in Executive Summary paragraph of Internal Audit Report

b) Considering the matter as immaterial it should be ignored
c) The Branch manager should be advised to rectify the discrepancy and the observation is
closed.
d) If the same discrepancy has not been reported in any other audit report, then it should be
rectified by the management for the vouchers of the audit period and the auditor should
verify the compliance of the same.

Answer is d).

Question 49

AD Chartered Accountants have been appointed central statutory auditors for the branches of
Efficient Bank Ltd for the year 2017-18. You are part of the audit team for Varanasi branch of the bank
and have been instructed by your senior to verify the exception report for the audit period. While
verifying the same you noticed that exception report is printed on a daily basis but the report of some
dates have not been signed by some officials, though the reports have been seen and verified by the
branch manager. The same observation was there in previous internal audit reports also. As a
statutory auditor, what will be your decision for disclosure of discrepancy in audit report?

a) Discuss the matter with the management and request for a written representation as audit
evidence.
b) Get all exception reports rectified within the audit period and give clear report.
c) Ignore the discrepancy as it is not material in nature.
d) Give a qualified opinion in the audit report.

Answer is a)
Question 50

Kothari Industries Ltd is engaged in business of manufacturing cement pipes. Under the new
legislation, the company is required to install safety equipment in its premises by December 31, 2017
after which there will be a penalty for non-compliance of Rs. 20,000 per month. The cost of the
equipment was Rs. 6,00,000. At March 31, 2018, the company failed to install the safety equipment.
What provision should be made in accordance with INDAS 37 “Provisions, Contingent Liabilities and
Contingent Assets” as on March 31, 2018?

Rs. 60,000

Question 51

The accountant of Ponto Ltd wants to calculate the net deferred tax expense for the year ended
March 31, 2018. The following information is available-

Particulars Deferred Tax Liability Deferred Tax Asset

March 31, 2017 Rs. 2,80,000 Rs. 80,000
March 31, 2018 Rs. 4,00,000 Rs. 88,000
The net deferred tax expense for the year ended March 31, 2018 is what?

Rs. 1,12,000

Question 52

During the year ended March 31, 2018, Zee Ltd has acquired 60% shares of Global. In accordance with
INDAS 103 “Business Combinations”, goodwill arising on acquisition of subsidiary amounted to Rs.
20,00,000. The tax rate applicable for Zee Ltd is 30%. What will be the deferred tax liability relating to
goodwill?

NIL