CA Final

Winding Up – CA Final Law Study Material is designed strictly as per the latest syllabus and exam pattern.

Winding Up – CA Final Law Study Material

Question 1.
Under what circumstances shall it be deemed that the substratum of a company has gone? A company has ceased to carry on two of the ten business stated as the main objects of the company. Examine whether the company can be wound up on the ground that substratum of the company is gone. [Nov. 08 (5 Marks)]
Answer:
Circumstances in which loss of substratum is deemed:

Substratum is the purpose or the main object, for which the company was formed. If the company has abandoned all of its main objects and not merely some of them, or if it cannot achieve any of its main objects, its substratum has gone and will be wound up by the Tribunal.

The substratum of a company is deemed to have disappeared or gone, if the main objects for which the company was formed has become impracticable, i.e. permanently impracticable. Usual tests for determining whether the substratum of the company has disappeared are whether:

(a) the subject matter of the company is gone, or
(b) the object for which it was formed has substantially failed, or
(c) it is impossible to carry on the business of the company except at a loss, which means there is no reasonable hope that the object of trading at a profit can be attained, or
(d) the existing and probable assets are insufficient to meet the existing liabilities.

Determination of loss of substratum of a company which ceased to carry on two of the ten business stated as the main objects of the company:
The substratum of the company cannot be said to have gone, since there are other businesses authorized by the Memorandum which can be carried out successfully. Therefore, company cannot be wound up on the ground that it has ceased to carry on two of the 10 business authorized by the Memorandum of Association.

Question 2.
LED Bulb Ltd., has made default in filing financial statements and annual returns for a continuous period of 4 financial years ending on 31st March, 2020. The Registrar of Companies having jurisdiction approached the Central Government to accord sanction to present a petition to Tribunal (NCLT) for the winding up of the company on the above ground u/s 272 of the Companies Act, 2013. Examine the validity of the ROC move, explaining the relevant provisions of the Companies Act, 2013. State the time limit for passing an order by the Tribunal u/s 273 of the Companies Act, 2013? [May 18 – New Syllabus (6 Marks), MTP-Oct.18]
Or
Clarks Limited, has made default in filing financial statements and annual returns for a continuous period of 4 financial years ending on 31st March, 2020. The Registrar of Companies having jurisdiction approached the Central Government to accord sanction to present a petition to Tribunal (NCLT) for the winding up of the company as per the above ground under Section 272 of the Companies Act, 2013.

Examine the validity of the RoC move, explaining the relevant provisions of the Companies Act, 2013. State the time limit for passing an order by the Tribunal under Section 273 of the Companies Act, 2013? [RTP-Nov. 19]
Answer:
Examination of Validity of ROC move to present a petition for winding up:

Sec. 271(1)(d) of Companies Act, 2013 provides that a company may, on a petition u/s 272, be wound up by the Tribunal, if the company has made a default in filing with the Registrar its financial statements or annual returns for immediately preceding five consecutive financial years.

In the present case, the Registrar of Companies having jurisdiction over the company approached the Central Government to accord sanction to present a petition to Tribunal (NCLT) for the winding up of the company on the ground that company has made default in filing financial statements and annual returns for a continuous period of 4 financial years ending on 31st March, 2019.

Conclusion: ROC move is not valid as at present default in filing the financial statements and annual returns subsists for four years as of now.

Time Limit for passing order by Tribunal u/s 273:
As per proviso to Sec. 273(1) of Companies Act, 2013, an order by the Tribunal is to be passed within 90 days from the date of presentation of the petition.

Question 3.
Mr. X is appointed as a liquidator for PQR Ltd. Referring the provisions of the Companies Act, 2013 advise him about the period within which he is required to apply to the Tribunal for setting up a winding up committee and discuss the constitution and functions of the winding up committee. [Nov. 19 – Old Syllabus (4 Marks)]
Answer:
Constitution and Functions of Winding up committee:
Sec. 277 of Companies Act, 2013 deals with composition and functions of Winding up committee. Accordingly,

(a) Constitution of Winding up committee:
Within 3 weeks from the date of passing of winding up order, the Company Liquidator shall make an application to the Tribunal for constitution of a winding up committee to assist and monitor the progress of liquidation proceedings by the Company Liquidator and such winding up committee shall comprise of the following persons, namely:

1. official Liquidator attached to the Tribunal;
2. nominee of secured creditors; and
3. a professional nominated by the Tribunal.

(b) Functions of winding up committee:
The Company Liquidator shall be the convener of the meetings of the winding up committee which shall assist and monitor the liquidation proceedings in following areas of liquidation functions, namely:

1. taking over assets S
2. examination of the statement of affairs;
3. recovery of property, cash or any other assets of the company including benefits derived therefrom;
4. review of audit reports and accounts of the company;
5. sale of assets;
6. finalisation of list of creditors and contributories;
7. compromise, abandonment and settlement of claims;
8. payment of dividends, if any; and
9. any other function, as the Tribunal may direct from time to time.

Question 4.
Define “contributory” in a winding up. Explain the liabilities of contributories as present and past member. [May 11 (8 Marks)]
Answer:
Meaning of Contributory:
Clause 26 of Section 2 of Companies Act, 2013 defines Contributory as a person liable to contribute towards the assets of the company in the event of its being wound up.
A person holding fully paid-up shares in a company shall be considered as a contributory but shall have no liabilities of a contributory under the Act whilst retaining rights of such a contributory.

Liabilities of contributories as present and past member:
As per Sec. 285 of Companies Act, 2013, while settling the list of contributories, the Tribunal shall include every person, who is or has been a member, who shall be liable to contribute to the assets of the company an amount sufficient for payment of the debts and liabilities and the costs, charges and expenses of winding up, and for the adjustment of the rights of the contributories among themselves.

This is, however, subject to following conditions:
(a) a person who has been a member shall not be liable to contribute if he has ceased to be a member for the preceding 1 year or more before the commencement of the winding up;

(b) a person who has been a member shall not be liable to contribute in respect of any debt or liability of the company contracted after he ceased to be a member;

(c) no person who has been a member shall be liable to contribute unless it appears to the Tribunal that the present members are unable to satisfy the contributions required to be made by them in pursuance of this Act;

(d) in the case of a company limited by shares, no contribution shall be required from any person, who is or has been a member exceeding the amount, if any, unpaid on the shares in respect of which he is liable as such member;

(e) in the case of a company limited by guarantee, no contribution shall be required from any person, who is or has been a member exceeding the amount undertaken to be contributed by him to the assets of the company in the event if it’s being wound up. But if the company has a share capital, such member shall be liable to contribute to the extent of any sum unpaid on any shares held by him as if the company were a company limited by shares.

Question 5.
M/s. IJK Limited was wound up with effect from 15th March 2021 by an order of the Court. Mr. A, who ceased to be a member of the company from 1st June 2020, has received a notice from the liquidator that he should deposit a sum of ₹ 5,000 as his contribution towards the liability on the shares previously held by him. In this context explain whether Mr. A can be called as a contributory, whether he can be made liable and whether there is any limitation on his liability. [Nov. 18 – Old Syllabus (4 Marks), RTP – May 19]
Answer:
Meaning of Contributory:
Clause 26 of Section 2 of Companies Act, 2013 defines Contributory as a person liable to contribute towards the assets of the company in the event of its being wound up.

A person holding fully paid-up shares in a company shall be considered as a contributory but shall have no liabilities of a contributory under the Act whilst retaining rights of such a contributory.

Liabilities of contributories as present and past member:

As per Sec. 285 of Companies Act, 2013, while settling the list of contributories, the Tribunal shall include every person, who is or has been a member, who shall be liable to contribute to the assets of the company an amount sufficient for payment of the debts and liabilities and the costs, charges and expenses of winding up, and for the adjustment of the rights of the contributories among themselves.

However, a person who has ceased to be a member for the preceding 1 year or more before the commencement of the winding up shall not be liable to contribute.

In the instant case, M/s, IJK Limited was wound up with effect from 15th March 2021 by an order of the Court. Mr. A, who ceased to be a member of the company from 1st June 2020, has received a notice from the liquidator that he should deposit a sum of ₹ 5,000 as his contribution towards the liability on the shares previously held by him.

Conclusion: Mr. A will be past member contributory and liability is limited to the extent of unpaid amount on the shares and in respect of debt or liability of the company contracted before he ceased to be the member of the company.

Question 6.
Info-tech Overtrading Ltd. was ordered to be compulsory wound up by an order dated 10th March, 2021 by the Tribunal. The official liquidator who has taken control of the assets and other records of the company has noticed that:

(i) One of the contributory whose calls are pending to be paid is about to leave India for evading payment of calls and;

(ii) A person having books of account of the company in his possession may abscond to avoid examination of books of account in respect of the affairs of the company.
Apprehending such possibilities, Tribunal detained such contributory for next 6 month disallowing him to leave India as well as arrest & seized books of account from the person which may possibly abscond to avoid examination of the affairs of the company.

Referring to the provisions of Companies Act, 2013, answer the following in current scenario;
(i) What is the validity of Tribunal’s order for detention of contributory disallowing him to leave India?
(ii) Is it correct from Tribunal’s part to arrest and seize books of account from the person planning to abscond to avoid examination of books of accounts in respect of the affairs of the company? [May 19 – New Syllabus (8 Marks)]
Answer:
Arrest of person trying to leave India or abscond:
As per Sec. 301 of the Companies Act. 2013, if at any time either before or after passing a winding up order, if the Tribunal is satisfied that a contributory or a person having property, account or papers of the company in his possession is about to leave India or otherwise to abscond, or is about to remove or conceal any of his property, for the purpose of evading payment of calls or of avoiding examination respecting the affairs of the company, the Tribunal may cause—

(a) the contributory to be detained until such time as the Tribunal may order; and
(b) his books and papers and movable property to be seized and safely kept until such time as the Tribunal may order.

Conclusion: Considering the provisions of Sec. 301 as stated above, following conclusions may be drawn:

1. Tribunal order for detention of contributory is valid.
2. Tribunal order as to arrest and seize books of account is proper.

Question 7.
M/s Raman Ltd. was wound up by the Tribunal. The company liquidator invited claims from its creditors which stood as under:

	₹
Income tax dues	11 lakhs
Sales tax dues	5 lakhs
Dues of workers	25 lakhs
Unsecured loans payable to directors	25 lakhs
Trade creditors who supplied raw material	15 lakhs
Secured creditor being the bankers of the company	75 lakhs
	156 lakhs

Company Liquidator could realize only ₹ 80 lakhs by sale of assets and realizations made from the company’s debtors, which is not sufficient to pay to all the creditors. Please decide the order of priority for payment to creditors explaining the relevant provisions of the Companies Act, 2013. [Nov. 09 (4 Marks)]
Answer:
Computation of amount likely to get by the creditors:

• As the amount available for distribution falls short of dues of workmen and secured creditors, the amount will be distribution proportionately among the secured creditors and workmen.
• Proviso to Sec. 325 provides that the security of every secured creditor shall be deemed to be subject to a pari passu charge in favour of the workmen to the extent of the workmen’s portion therein.
• Workmen’s portion, in relation to the security of any secured creditor of a company, means the amount which bears to the value of the security the same proportion as the amount of the workmen’s dues bears to the aggregate of the amount of workmen’s dues and the amount of the debts due to the secured creditors.
• Accordingly, workmen share in secured assets may be computed as:
  
• Amount available to secured creditor is ₹ 80 Lakhs – ₹ 20 Lakhs = ₹ 60 Lakhs
• Amount available for payment of government dues and unsecured creditors is nil.

Question 8.
XYZ Limited is being would up by the tribunal. All the assets of the company have been charged to the company’s bankers to whom the company owes ₹ 5 crores. The company owes following amounts to others:

• Dues to workers – ₹ 1,25,00,000
• Taxes Payable to Government – ₹ 30,00,000
• Unsecured Creditors – ₹ 60,00,000

You are required to compute with the reference to the provision of the Companies Act, 2013 the amount each kind of creditors is likely to get if the amount realized by the official liquidator from the secured assets and available for distribution among creditors is only ₹ 4,00,00,000/-.
Answer:
Computation of amount likely to get by the creditors:

Proviso to Sec. 325 provides that the security of every secured creditor shall be deemed to be subject to a pari passu charge in favour of the workmen to the extent of the workmen’s portion therein.

Workmen’s portion, in relation to the security of any secured creditor of a company, means
the amount which bears to the value of the security the same proportion as the amount of the workmen’s dues bears to the aggregate of the amount of workmen’s dues and the amount of the debts due to the secured creditors. –

Accordingly, workmen share in secured assets may be computed as:

• Amount available to secured creditor is ₹ 400 Lakhs – ₹ 80 Lakhs = ₹ 320 Lakhs
• Amount available for payment of government dues and unsecured creditors is nil.

Question 9.
In relation to winding up of a company,.explain dearly the meaning of the term ‘overriding preferential payments’. Examine the provisions of the Companies Act and decide whether the following debts of a company under the winding up shall be ‘Preferential payments’ and shall be paid in priority to the claim of unsecured creditors:

(a) Wages amounting to ₹ 30,000(Rupees Thirty thousand) only of an employee for services rendered for a period of 8 months within the preceding 12 months next before the relevant date.
(b) ₹ 1 lac due to an employee from Provident Fund and ₹ 50,000 towards gratuity.
(c) ₹ 20,000/- payable by the company on account of expenses incurred in respect of investigation held u/s 213 of the Companies Act, 2013. [Nov. 10 (8 Marks)]
Answer:
Meaning of Overriding preferential Payments:
Section 326 of Companies Act, 2013 deals with the overriding preferential payments. Accordingly, not withstanding anything contained in this Act or any other law for the time being in force, in the winding up of a company,
(a) workmen’s dues; and
(b) debts due to secured creditors to the extent such debts rank pari passu with such dues, shall be paid in priority to all other debts.

As per Sec. 327 of Companies Act, 2013, in a winding up, subject to the provisions of section 326, there shall be paid in priority to all other debts:

(a) all revenues, taxes, cesses and rates due from the company to the C.G. or a S.G. or to a local authority at the relevant date, and having become due and payable within the 12 months immediately before that date;

(b) all wages or salary due for a period not exceeding 4 months within the 12 twelve months immediately before the relevant date, subject to the condition that the amount payable under this clause to any workman shall not exceed such amount as may be notified;

(c) all accrued holiday remuneration becoming payable to any employee;

(d) unless the company is being wound up voluntarily merely for the purposes of reconstruction or amalgamation with another company, all amount due in respect, of contributions payable during the period of 12 months immediately before the relevant date by the company as the employer of persons under the ESI Act, 1948 or any other law for the time being in force;

(e) all amount due in respect of any compensation or liability for compensation under the Workmen Compensation Act, 1923 in respect of the death or disablement of any employee of the company;

(f) all sums due to any employee from the provident fund, the pension fund, the gratuity fund or any other fund for the welfare of the employees, maintained by the company; and

(g) the expenses of any investigation held in pursuance of sections 213 and 216, in so far as they are payable by the company.

Based on the provisions of Secs. 326 and 327 as stated above, following conclusions may be drawn:
(a) Wages for a period not exceeding 4 months within the preceding 12 months next before the relevant date will be the preferential payment.
(b) PF and gratuity in entirety are preferential payments.
(c) Expenses of investigation u/s 213 is preferential payment.

Question 10.
Modern Textiles Limited incurred huge losses during the last three financial years and its financial position was bad. The Company created a legal mortgage on some of its immovable properties in favour of a bank on 1st Sep., 2020 in the hope that by keeping good faith with the bank it could get further advances from the bank and the same could be utilized to revive the Company. Some creditors filed winding up petition on 15th January, 2021. Answer the following with reference to the provisions of the Companies Act, 2013:
(a) What is meant by ‘Fraudulent Preference’? State the effect of ‘Fraudulent Preference.
(b) Whether the creation of legal mortgage by the Company in favour of the bank would amount to fraudulent preference? [Nov. 13 (8 Marks)]

A company was in financial distress. They pledged certain movable properties with a nationalised bank in the belief that their loan limits would be increased. However, within 3 months, some creditors filed a petition for winding up. The management was accused of fraudulent preference:
(a) In the above context discuss fraudulent preference.
(b) Would your answer be different if the charge was created in favour of an NBFC? [May 16 (4 Marks)]
Answer:
(a) Fraudulent Preference:
Section 328 of Companies Act, 2013 deals with the fraudulent preference. Accordingly,

Where a company has given preference to a person who is one of the creditors of the company, or a surety or guarantor for any of the debts or other liabilities of the company, and the company does anything or suffers anything done which has the effect of putting that person into a position which, in the event of the company going into liquidation, will be better than the position he would have been in if that thing had not been done prior to 6 months of making winding up application, the Tribunal, if satisfied that such transaction is a fraudulent preference may order as it may think fit for restoring disposition to what it would have been if the company had not given that preference.

If the Tribunal is satisfied that there is a preference transfer of property, movable or immovable, or any delivery of goods, payment, execution made, taken or done By or against a company within 6 months before making winding up application, the Tribunal may order as it may think fit and may declare such transaction invalid and restore the position.

(b) Pledge of movable properties with a nationalised bank, whether amount to fraudulent preference: For the purpose of proving a fraudulent preference, two things need be shown, viz.:

(a) that in the case of a winding-up, the transaction took place within 6 months before the presentation of the petition; and
(b) that the main motive in the mind of the company, acting through its directors, was to prefer one creditor to the other.

Thus, pledging certain movable properties or mortgaging immovable properties with a bank is not a fraudulent preference because it has been done in the good faith so that their loan limits would be increased. It is a transaction in good faith. Answer would remain same if the charge was created in favour of an NBFC.

Question 11.
Info-tech Overtrading Ltd. was ordered to be wound up compulsory on a petition filed on 10th March, 2021 before the Tribunal. The official liquidator who has taken control for the assets and other records of the company has noticed the following:

The Managing Director of the company has sold certain properties belonging to the company to a private company in which his son was interested causing loss to the company to the extent of INR 50 lakhs. The sale took place on 15th October, 2020.

Examine what action the official liquidator can take in this matter, having regard to the provisions of the Companies Act, 2013. [MTP-March 18, March 19]
Answer:
Transactions to be treated as Fraudulent preference:

Sec. 328 of the Companies Act, 2013 provides that if the Tribunal is satisfied that there is a preference transfer of property, movable or immovable, or any delivery of goods, payment, execution made, taken or done by or against a company within 6 months before making winding up application, the Tribunal may order as it may think fit and may declare such transaction invalid and restore the position.

In the present case, Managing Director of the company has sold certain properties belonging to the company to a private company in which his son was interested causing loss to the company to the extent of ₹ 50 lakhs. The sale took place on 15th October, 2020. Petition for winding up filed on 10th March, 2021 before the Tribunal. Transaction of sale of properties has taken within 6 months before making winding up application.

Conclusion: Official Liquidator may apply to Tribunal to treat the sale of properties as a transaction for fraudulent preference and restoring the position.

Question 12.
By an order dated 25th June, 2020, NCLT had ordered for winding up of Kamath Trading Limited. Consequently, Official Liquidator took control for the assets and other records of the Company. During the winding up proceedings, the Official Liquidator came across a transaction where some of the properties of the Company was sold to a small Private Company. Mr. Nag, who was interested in that small Private Company happened to be the brother of Director of Kamath Trading Limited.

The sale of the said properties took place on 20th March, 2020 at a price which was ₹ 58 Lacs less than the market price. In the light of the facts given above, examine, with reference to relevant provisions of the Companies Act, 2013, what action the Tribunal can take in this regard? [Nov. 20 – New Syllabus (4 Marks)]
Answer:
Transactions to be treated as Fraudulent preference:

Sec. 328 of the Companies Act, 2013 provides that if the Tribunal is satisfied that there is a preference transfer of property, movable or immovable, or any delivery of goods, payment, execution made, taken or done by or against a company within 6 months before making winding up application, the Tribunal may order as it may think fit and may declare such transaction invalid and restore the position.

In the present case, during the winding up proceedings, the Official Liquidator came across a transaction where some of the properties of the Company was sold to a small Private Company. Mr. Nag, who was interested in that small Private Company happened to be the brother of Director of Kamath Trading Limited. The sale of the said properties took place on 20th March, 2020 at a price which was ₹ 58 Lacs less than the market price.

Conclusion: Official Liquidator may apply to Tribunal to treat the sale of properties as a transaction for fraudulent preference and restoring the position.

If the Tribunal is satisfied that there is a preference transfer of property, movable or immovable, within 6 months before making winding up application, the Tribunal may order as it may think fit and may declare such transaction invalid and restore the position.

Question 13.
Skyline Ltd. was ordered to be wound up compulsory on a petition filed on 10th February, 2021 before Tribunal. The official liquidator who has taken control for the assets and other records of the company has noticed that the Managing Director of the company has transferred certain properties belonging to the company to one of its creditor “Vansh (Pvt.) Ltd”, in which his son was interested. This was causing huge monetary loss to the company. The sale took place on 15th September, 2020.

Determine the rights and liabilities of fraudulently preferred persons by mortgage of charge of property to him to secure the company’s debt. [MTP-March 18, April 19]
Answer:
Determination of rights and liabilities of fraudulently preferred persons:
As per Sec. 331 of the Companies Act, 2013, where a company is being wound up and anything made, taken or done after the commencement of this Act is invalid under section 328 as a fraudulent preference of a person interested in property mortgaged or charged to secure the company’s debt, then, without prejudice to any rights or liabilities arising, apart from this provision, the person preferred shall be subject to the same liabilities, and shall have the same rights, as if he had undertaken to be personally liable as a surety for the debt,-

• to the extent of the mortgage or charge on the property, or
• the value of his interest, whichever is less.

Question 14.
Due to an unprecedented flood, all the fixed assets of a company were damaged extensively beyond renovation or repair. The cost of replacement of assets were huge and the sum insured on the fixed assets did not cover all the assets. Therefore, the operations of the company were permanently discontinued. Meanwhile, based on a winding-up petition filed by the secured creditors, the High Court passed a Winding-up order.

The workers of the company opposed to the winding-up petition and also filed an appeal against the winding-up order. The workers are not sure whether their appeal would be heard in the winding-up proceedings. Examine, under the provisions of the Companies Act, 2013, whether the appeal filed by the workers would succeed and their dues/interest will be protected in priority? [Nov. 19 – New Syllabus (4 Marks)]
Answer:
Rights of workers w.r.t. Winding up of the company:

There is no specific provision in Companies Act, 2013, as to workers’.rights at the time of filing of winding up petition. However, in may legal cases, it has been held that the workers of a company are entitled to appear at the hearing of the winding-up petition whether to support or to oppose it. They have a locus standi to appear and be heard both before the petition is admitted and an order for advertisement is made as also after the admission and advertisement of the petition until an order is made for winding up the company.

The workers also have a right of appeal against a winding up order. But when a winding-up order has become final, the workers ordinarily would not have any right to participate in any proceeding in the course of winding up.

As per Sec. 279 of the Companies Act, 2013, when a winding up order has been passed, no suit or other legal proceeding shall be commenced, or if pending at the date of the winding up order, shall be proceeded with, by or against the company, except with the leave of the Tribunal and subject to such terms as the Tribunal may impose.

As per Secs. 326 and 327 of the Companies Act, 2013, in the winding up of a company under this Act, the workmen’s dues shall be paid in priority to all other debts ranking pari passu with secured creditors.

Conclusion: Based on the discussion as stated above, it may be concluded that workers concerns will be duly considered and their dues will be given priorities as per provisions of sections 326 and 327.

Assessment of Charitable/ Religious Trusts, Political Parties & Electoral Trusts – CA Final DT Question Bank is designed strictly as per the latest syllabus and exam pattern.

Assessment of Charitable/ Religious Trusts, Political Parties & Electoral Trusts – CA Final DT Question Bank

Taxation of Political Parties & Electoral Trust

Question 1.
(i) An electoral trust approved by the Central Board of Direct Taxes is not liable to income-tax in respect of voluntary contribution received and other income. Discuss the correctness of the statement.
(ii) What is the effect of contribution made by an individual to electoral trust on his taxable income? [CA Final May 2011, May 2010] [4 Marks]
Answer:
(i) The statement is incorrect. As per Sec. 13B, any voluntary contributions received by an electoral trust shall not be included in the total income of the previous year of such electoral trust, if:

• such electoral trust distributes to a registered political party during the year, 95% of the aggregate donations received by it during the year, along with surplus brought forward from any earlier year, and
• the electoral trust functions in accordance with the rules framed by the Central Government.

If the above conditions are satisfied, then only the electoral trust can get benefit of exemption u/s 13B in respect of voluntary contribution received by it. However, the exemption cannot be claimed in respect of any other income of the electoral trust.

(ii) As per Sec. 80GGC, an individual can claim deduction from gross total income in respect of amount contributed to an electoral trust during the year.

Taxation of Charitable/Religious Trusts

Question 2.
Asha Memorial Trust running hospitals is registered u/s 12A. Following particulars relevant for the previous year ended 31st March, 2021 are furnished to enable you to compute tax liability of the trust.

1. Income from running of hospitals ₹ 14.25 lakhs.
2. Donation received (including anonymous donation ₹ 3 lakhs) ₹ 5.75 lakhs.
3. Amount applied for the purposes of hospital ₹ 13 lakhs.
4. The trust had accumulated ₹ 15 lakhs u/s 11(2) in the financial year 2014-15 for a period of five years for extension of one of its hospitals. The trust has spent ₹ 13.50 lakhs for the said purpose till 31st March, 2020.

Compute the taxable income of the trust and tax payable by Asha Memorial Trust for the A.Y. 2021-22. [CA Final May 2010] [6 Marks]
Answer:
Computation of Taxable Income of Asha Memorial Trust for A.Y. 2021-22

Notes:
(1) As per Section 11(3), where the income accumulated for the specified purpose by the trust is not utilized for the said purpose within the period (not exceeding 5 years) for which it was accumulated, or in the year immediately following the expiry thereof, then the unutilised amount is deemed to be the income of the charitable institution for the year immediately following the expiry of the period of accumulation. In the given case, the institution accumulated ₹ 15,00,000 in the previous year 2014-15 for extension of one of its hospitals for a period of 5 years. Period of accumulation thus expired on 31.3.2020. The assessee has spent ₹ 13,50,000 [out of accumulated sum of ₹ 15,00,000] upto 31.3.2020. Hence, the unutilised amount of ₹ 1,50,000 is deemed to be income of the P.Y. 2020-21 (A.Y. 2021-22).

(2) Only the anonymous donations in excess of the limit specified below would be subject to tax @ 30% u/s 115BBC. The limit is the higher of the following:

• 5% of the total donations received by the assessee (5% of ₹ 5,75,000) = ₹ 28,750 or
• ₹ 1 lakh.

Therefore, Anonymous donations taxable @ 30% shall be ₹ 3,00,000 – ₹ 1,00,000 = ₹ 2,00,000
Now, total donation is ₹ 5,75,000 of which taxable Anonymous donation is ₹ 2,00,000.
Thus, Donations (other than taxable anonymous donations) taxable at normal rate = ₹ 5,75,000 – ₹ 2,00,000 = ₹ 3,75,000.

Here, a view is taken that the amount of anonymous donations exempt from the applicability of 30% tax [₹ 1,00,000 in this solution] is eligible for retention/accumulation to the extent of 15% as per sec. 11(1) without conditions in the same line as with other income and the voluntary contributions. A contrary view may also be taken that such anonymous donations chargeable to tax at normal rates are not eligible for retention/accumulation to the extent of 15%. If this view is taken, ₹ 2,55,000, being 15% of 17,00,000, has to be set apart (instead of ₹ 2,70,000, being 15% of ₹ 18,00,000)

Question 2.
A charitable institution registered u/s 12A of the Income-tax Act, 1961 filled in Form No. 10 for seeking permission to accumulate unapplied income u/s 11(2) of the Act for the objects of the institution and submitted it to the A.O. along with the resolution for accumulation. The A.O. found that the objects for which accumulation was sought were not particularized in as much as they covered the entire range of objects of the institution. Can the A.O. deny the benefit of accumulation in such a case? [CA Final Nov. 2010] [4 Marks]
Answer:
Section 11(2) provides that where 85% of the income referred in section 11(1 )(a) is not applied during the previous year but is accumulated or set apart, either in whole or in part, for application to charitable religious purpose, then such accumulated income shall not be included in total income of that previous year, provided that,

• the purpose for which the income is accumulated or set apart and
• the period for which the income is accumulated which shall not exceed 5 years,

are specified by furnishing a statement in prescribed form to the A.O. in prescribed manner.

In Bharat Krishak Samaj v. Deputy DIT (Exemption) (2008) (Del.), it was held that it is not necessary for a charitable trust to particularise each and every object for which accumulation is sought. It is enough if the assessee seeks permission for accumulation for the objects of the trust.

Therefore, in the given question, even though while seeking permission of the Assessing Officer to accumulate unapplied income for the objects of the institution, the institution has not stated the objects in particular for which accumulation is sought for the Assessing Officer cannot deny the benefit of accumulation in such a case.

Question 3.
“Save Wild Life” an institution having its main object as ‘preservation of wildlife’, used the entire income which it derived from an activity in the nature of trade for its main object during the P.Y. 2020-21. The institution seeks your opinion to know whether such utilization of its income be treated for “charitable purpose”? Would your answer be different, if the main object of the institution is “advancement of object of general public utility”? [CA Final May 2011] [4 Marks]
Answer:
“Charitable purpose” as defined in section 2(15) includes relief of the poor, education, yoga, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest and the advancement of any other object of general public utility. Therefore, preservation of wildlife is included in the definition of “charitable purpose” under section 2(15).

But as per the provisos to section 2(15), the “advancement of any other object of general public utility” shall not be treated as a charitable ; purpose, if the institution is carrying on any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for access or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income derived from such activity.

This restriction is not applicable to the purposes specified in the first six limbs of the definition. Therefore, an institution having the preservation of wildlife as its main object would not be subject to the restrictions which are applicable to the “advancement of any other object of general public utility”. Such institution would continue to retain its “charitable” status, even if it derives income from an activity in the nature of trade.

However, if the institution’s main object is “advancement of any other object of general public utility” and derives income from an activity in the nature of trade during the financial year, it would lose its “charitable” status for that year, even if it applies such income for its main objects.

It may be noted that if such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility and the aggregate receipts from such activity or activities, during the previous year, does not exceed 20% of the total receipts, of the trust or institution undertaking such activity or activities, for the previous year, then, the institution would not lose its “charitable” status, even if its main object is “advancement of any other object of general public utility”.

Question 4.
Jyoti Education Centre, a charitable institution registered u/s 12AA runs schools for primary and secondary education. The following particulars pertaining to the P.Y. 2020-21 are furnished to you by the institution:

Compute total income of the institution and tax payable by it for the A.Y. 2021-22. [CA Final Nov. 2011] [10 Marks]
Answer:

Notes:
(1) Only the anonymous donations in excess of the limit specified below would be subject to tax @ 30% under section 115BBC. The limit is the higher of the following:

• 5% of the total donations received by the assessee (5% × ₹10,50,000) = ₹ 52,500 or
• 1 lakh.
  Therefore, Anonymous donation taxable 30% shall be ₹ 2,50,000 – ₹ 1,00,000 = ₹ 1,50,000.

Now, total donation is ₹ 10,50,000 of which taxable Anonymous donation is ₹ 1,50,000.

Thus, Donations (other than taxable anonymous- donations) taxable at normal rate = ₹ 10,50,000 – ₹ 1,50,000 = ₹ 9,00,000.

Here, a view is taken that the amount of anonymous donations exempt from the applicability of 30% tax [₹ 1,00,000 in this solution] is eligible for retention/accumulation to the extent of 15% as per sec. 11(1) without conditions in the same line as with other income and the voluntary contributions.

A contrary view may also be taken that such anonymous donations chargeable to tax at normal rates are not eligible for retention/accumulation to the extent of 15%. If this view is taken, ₹ 13,44,750, being 15% of ₹ 89,65,000, has to be set apart (instead of ₹ 13,59,750, being 15% of ₹ 90,65,000)

(2) As per Sec. 2(24)(xviii), assistance in the form of a subsidy received from the Central or State Government or any authority or body or agency shall be taxable.

(3) ₹ 35 lakhs, being excess of expenditure over income in the preceding financial year 2019-20 can be treated as application of income of the current year as held by Delhi High Court in Raghuvanshi Charitable Trust and others (2011).

(4) ₹ 3,50,000 applied for the benefit of the founder of the institution is taxable under section 12(2) read with section 13(1)(c)(d). This amount is taxable at the maximum marginal rate of 30% as per section 164(2).

(5) As per section 11 (3) where the income accumulated for the specified purpose by the trust is not utilized for the said purpose within the period (not exceeding 5 years) for which it was accumulated, or in the year immediately following the expiry thereof, then the unutilized amount is deemed to be the income of the charitable institution for the year immediately following the expiry of the period of accumulation.

In the given question, the institution accumulated ₹ 20,00,000 in the previous year 2017-18 for acquiring and developing a land for construction of a new school for a period of 2 years. Period of accumulation thus expired on 31.3.2020. The assessee has spent ₹ 17,00,000 [out of accumulated sum of ₹ 20,00,000] in the P.Y. 2020-21. Hence, the unutilized amount of ₹ 3,00,000 is deemed to be income of the previous year 2020-21.

Question 5.
MSO Foundation, a charitable institution set up on 1st April, 2020 and registered under section 12AA with effect from that date, is engaged in providing education in hotel management. The organisation acquires a building for using the same for holding classes and office activities. It has approached you for your opinion on its eligibility to claim the cost of the building and also depreciation thereon in the current year and the subsequent year. Advise the institution indicating the reasons. [CA Final Nov. 2012] [4 Marks]
Answer:
As per section 11,15% of the income from property held for charitable purposes is exempt from tax and the remaining 85% of such “income” would be exempt if it is “applied” for charitable purposes in India.

Where the expenditure is incurred for the purposes of carrying on the objects of the trust, it would be treated as application of income even if such expenditure is for capital purposes. Therefore, since the building is acquired by the organization for holding classes and office activities, : which is for the purposes of carrying on the objects of the charitable institution i.e., for providing education in hotel management, the cost of the building would be treated as application of income.

Further, section 11(6), provides that where the capital expenditure has been treated as application of Income by the trust or institution, it cannot claim depreciation on such capital expenditure in the current year and the subsequent years.

Question 6.
Ramji Charitable Trust, registered u/s 12AA and recognized u/s 80G was created for providing relief to disabled persons. It filed the return of income for the year ended 31.3.2021, declaring ‘Nil’ income. While completing the assessment, the A.O. found that a large sum was donated to the corpus of another trust by the assessee i.e., Ramji Charitable Trust. The contention of the assessee was that such donation was made out of the permissible accumulation of income of past years upto 15% u/s 11 (1) (a) of the Act.

The A.O. added the donation so made and by invoking the Explanation to section 11(2), computed the taxable income of the assessee. Discuss the validity of the action of the A.O., in this case. [CA Final Nov. 2014] [4 Marks]
Answer:
In the case of DIT (Exemption) v. Bagri Foundation (2010), the Delhi High Court held that the withdrawal of exemption as provided in Explanation to Sec. 11(2) is not’ applicable for the amount accumulated upto 15% u/s 11(1)(a). Thus, any amount paid out of such income accumulated to any trust or institution registered u/s 12AA or 12AB or 10(23C) is valid.

Consequently, if the donations made by Ramji Charitable Trust to another charitable trust were out of past accumulations upto 15% under section 11(1)(a), the same would not be liable to be included in the total income.

The action of the Assessing Officer in invoking the Explanation to section 11(2), to add such donations while computing the total income of the trust is, therefore, not valid.

Question 7.
A public charitable trust registered under section 12AA runs a hospital and also a medical college. It furnishes you the following information for the year ended 31st March, 2021:
(i) Gross receipt from Hospital ₹ 425 lakhs
(ii) Income from business – incidental to main objects ₹ 2 lakhs.
(iii) Voluntary contributions received from public ₹ 32 lakhs. It includes corpus donation of ₹ 3 lakhs and anonymous donation of ₹ 5 lakhs.
Note: Voluntary contributions are included in Gross receipt given in (i) above.
(iv) Hospital operational expenses ₹105 lakhs. (This does not include capital expenditures and depreciation).
(v) Income from Medical College (solely for education purpose) ₹ 10 lakhs. Gross receipts of college for the year ₹ 90 lakhs.
(vi) Gross receipt given in (i) above includes a sum of ₹ 55 lakhs which has accrued but not received. However, a sum of ₹ 18 lakhs was received j only on 31st day of March, 2021.
(vii) The trust set apart t 80 lakhs for acquiring a building to expand its hospital. But the amount was paid in May 2021 when sale deed was registered in its name.
(viii)In June, 2020, the trust purchased and installed new computer software for ₹ 28 lakhs. The rate of depreciation is 40% as per Income-tax
Act, 1961.
(ix) The trust incurred ₹ 35 lakhs towards purchase of laptops, computers and printers for the hospital.
(x) It repaid loan of ₹ 15 lakhs taken earlier for construction of hospital building.

Compute the total income of the trust for the A. Y. 2021 -22 in order to avail maximum benefits within the law. [CA Final May 2015] [8 Marks]
Answer:
Computation of total income of the trust for the A.Y. 2021-22


For further reducing the tax liability, the trustees may, in accordance with section 11(2), furnish a statement in the prescribed form to the A.O. in the prescribed manner about their intention to accumulate ₹ 34.76 lakhs [₹ 37.26 lakhs minus ₹ 2.50 lakhs (basic exemption limit)] specifying the period (which in no case will exceed 5 years) and the purpose for which the accumulation is to be made and invest such sum in the modes specified u/s 11(5). Then such accumulation would not be includible in the total income and no tax will be payable on the total income (other than anonymous donations of ₹ 3.4 lakhs taxable @ 30% u/s 115BBC).

Notes:
(1) As per section 115BBC(1), the anonymous donations in excess of the higher of the following would be subject to tax @ 30%;

• ₹ 1 lakh; or
• ₹ 1.60 lakh, being 5% of the total donations received i.e., 5% of ₹ 32 lakhs.

Therefore, anonymous donations of ₹ 3.4 lakh (₹ 5 lakh – ₹ 1.60 lakh), would be subject to tax @ 30% under section 115BBC.

As per section 13(7), such anonymous donations are not eligible for the benefit of exclusion from total income under sections 11 and 12. Here, a view is taken that the amount of anonymous donations exempt from the applicability of 30% tax [₹ 1,60,000 in this solution] is eligible for retention/accumulation to the extent of 15% as per sec. 11(1)(a) in the same line as with other income and the voluntary contributions.

A contrary view may also be taken that such anonymous donations chargeable to tax at normal rates are not eligible for retention/accumutation to the extent of 15%. If this view is taken, ₹ 47.10 lakhs, being 15% of ₹ 314 lakhs has to be set apart (instead of ₹ 47.34 lakhs, being 15% of ₹ 315.60 lakhs)

(2) For availing the benefit of Deemed application as per Explanation 2 to section 11(1), the person in receipt of income from the property held under trust, has to exercise the option in writing, before the expiry of the time allowed u/s 139(1) to treat such income as deemed application of the year in which the income is earned.

(3) As per section 11(6), where the cost of assets is claimed as application, no deduction for depreciation on such assets would be allowed in determining income of the trust for the purposes of application. Hence, as the cost of new computer software, laptops, computers and printers purchased for the hospital has been claimed as application of income, no depreciation would be allowed on these assets while calculating income for the purpose of application.

(4) The word “applied” used in section 11 does not necessarily imply “spent”. Even if a certain amount is irretrievably earmarked and allocated for charitable purposes, the said amount can be deemed to have been applied for charitable purposes. [CIT y. Trustees of H.E.H. Niarns Charitable Trust (1981)(AP)]

Question 8.
State with reasons the validity of the following statement:
Charitable trusts and institutions registered u/s 12AA or 12AB, cannot claim exemption under any of the clauses of Section 10. [CA Final Nov. 2015] [2 Marks]
Answer:
The statement is not valid.
As per Sec. 11(7), where a trust or institution has been granted registration u/s 12AA or 12AB and the registration is in force for a previous year, then, I such trust or institution can still claim exemption of agricultural income u/s 10(1) as well as exemption available u/s 10(23C).

Therefore, the statement that such trust or institution cannot claim exemption under any of the clauses of section 10 is not valid, since it can still claim exemption u/s 10(1) and u/s 10(23C).

Question 9.
Keeping in view that Yoga is the present focused area and has been granted international recognition by the United Nations Organisation (UNO), an institution called “Hindustan Mahan” having ‘Yoga’ as its main object was registered u/s 12AA. For the P.Y. 2020-21, the total receipts of the institution are ₹ 135 lakhs including ₹ 26.5 lakhs from business activity.

(i) State with reasons whether the institution will continue to retain its “Charitable Status” and be eligible for exemption under section 11 ‘ for the Assessment Year 2021-22.
(ii) What would have been the effect, had the main object of the institution been “advancement of any other object of general public utility” and it had applied its receipts from business activities towards such main object? [CA Final Nov. 2016] [6 Marks]
Answer:
(i) As per section 2(15), “Charitable purpose” includes relief of the poor, education, yoga, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest and the advancement of any other object of general public utility. Therefore, yoga is included in the definition of “charitable purpose” under section 2(15).

But as per the proviso to section 2(15). the “advancement of any other object of general public utility shall not be a charitable purpose. if the institution is carrying on any activity in the nature of trade, commerce or business, or activity of rendering any service in relation to any trade, commerce or business, for access or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income derived from such activity.

However, this restriction is not applicable to the purposes specified in the first six limbs of the definition. Therefore, an institution having ‘yoga’ as its main object would not be subject to the restriction of carrying on any activity in the nature of trade, commerce or business. Such institution would continue to retain its “charitable status”, even if it derives income from an activity in the nature of trade.

This restriction is applicable only to the “advancement of any other object of general public utility”. Therefore, “Hindustan Mahan” will continue to retain its “Charitable Status” and will be eligible for 1 exemption u/s 12AA for the A.Y. 2021-22 even if its total receipts include some receipts from business activity.

(ii) In case, if the institution’s main object is “advancement of any other object of general public utility” and it derives income from an activity in the nature of trade during the financial year, it would lose its “charitable status-” for that year, even if it applies such income for its main objects.

However, if such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility and the aggregate receipts from such activity or activities, during the previous year, does not exceed 20% of the total receipts, of the trust or institution undertaking such activity or activities, for the previous year, then, the institution would not lose its “eharitable” status, even if its main object is “advancement of any other object of general public utility”.

In this case, the receipts from business activity are ₹ 26.5 lakhs which does exceed 20% of the total receipts of the institution and therefore, Hindustan Mahan will not lose its “Charitable Status”.

Question 10.
Rural Health Care Trust was formed on 1 st April, 2019 with the object of providing medical relief to people residing in rural areas of Assam. The trust applied for registration u/s 12AA on 15th May, 2020 to the CIT. Till the due date for filing ROI for A.Y. 2021-22, the CIT has not passed any order granting or refusing to grant such registration. The trust has filed its , ROI for A.Y. 2020-21 claiming exemption u/s 11 taking a view that as the order has not been passed by the Commissioner of Income-Tax within the prescribed period, the trust should be deemed to be registered u/s 12AA.

Discuss and explain, whether the view taken by the trust is correct. [CA Final Nov. 2017] [4 Marks]
Answer:
Issue involved: The issue under consideration is whether the trust would be deemed to be registered u/s 12AA when an application for registration of the trust made u/s 12A and the same is not respond within a prescribed time.

Provisions applicable: As per section 12AA, on receipt of application, the COMMISSIONER shall after proper enquiries pass an order in writing, If I satisfied then registering the Trust/Institution and If Not Satisfied then refusing to register. However every order granting or refusing registration shall be passed before expiry of 6 Months from the end of the month in which APPLICATION was received u/s 12A.

Analysis: The facts of the case are similar to the facts in CIT v. Society for the Promotion of Education (2016) (SC) wherein the above issue came up before the Supreme Court. The Apex Court held that once an application for registration of the trust is made u/s 12A and in case the same is not responded to within 6 months, the trust would be deemed to be registered u / s 12 AA as the non-consideration of the application for registration within the time fixed by the legal provision would lead to deemed grant of registration and there is no reason to make the assessee suffer merely because the Department is not able to keep its officers under check and control so as to take timely decisions on the matter. The Supreme Court further held that the deemed registration would commence only after 6 months from the date of application.

Conclusion: Thus, applying the rationale of the Supreme Court ruling to the present case, the view taken by the Rural Health Care Trust is correct that the trust shall be deemed to be registered u/s 12AA after a period of 6 month from the date of application u/s 12A as the same is not respond by the commissioner within a period of 6 month.

Question 11.
Mathi Charitable Trust registered u/s 12AA following cash system of accounting furnishes you the following information:
(i) Gross receipts from hospital by name “Full Cure” ₹ 400 lakhs.
(ii) Gross receipts from college by name “India Arts College” ₹ 180 lakhs (offering recognized degree courses).
(iii) Corpus donations by way of cheque ₹ 30 lakhs and by way of cash ₹ 5 Lakhs.
(iv) Anonymous donations by cash ₹ 10 Iakhs.
(v) Administrative expenses for hospital ₹ 220 lakhs and for college ₹ 100 lakhs.
(vi) Fees not realized from patients ₹ 20,60,000 and from students of the college ₹ 6,50,000 as on 31.03.2021.
(vii) Depreciation on assets of the trust ₹ 18,00,000. The entire cost of assets ₹ 300 lakhs claimed as application in the earlier years.
(viii) Acquired a building for ₹ 120 lakhs on 01.06.2020 for expansion of hospital (cost of land included therein ₹ 100 lakhs). Stamp duty value of the land and building on the date of registration of sale deed ₹ 140 lakhs.
(ix) The trust gave donation of ₹ 25 lakhs to Gandhiji Free Trust having objects of charitable nature registered under section 12AA but not similar to the objects of the donor trust.

You are required to compute the total income of the trust and its income-tax liability in such a manner that it can avail the optimal benefit within the four corners of the Income-tax Act, 1961. Note: The trust does not want to seek accumulation of income by virtue of section 11(2) of the Act. [CA Final May 2018 (Old Syllabus)] [10 Marks]
Answer:
Computation of Total Income of the trust for the A.Y. 2021-22

Notes
(1) As per section 115BBC(1), the anonymous donations in excess of the higher of the following would be subject to tax @ 3096;

• ₹ 1 lakh; or
• ₹ 2.25 lakhs, being 5% of the total donations received i.e., 5% of ₹ 45 lakhs.

Therefore, anonymous donations of ₹ 7.75 lakhs (₹ 10 lakhs – ₹ 2.25 lakhs) would be subject to tax @ 30% under section 115BBC.

As per section 13(7), such anonymous donations are not eligible for the benefit of exclusion from total income under sections 11 and 12.

Here, a view is taken that the amount of anonymous donations exempt from the applicability of 30% tax [₹ 2,25,000 in this solution] is eligible for retention/accumulation to the extent of 15% as per sec. 11(1)(a) in the same line as with other income and the voluntary contributions.

A contrary view may also be taken that such anonymous donations chargeable to tax at normal rates are not eligible for retention/accumulation to the extent of 15%. If this view is taken, ₹ 39.00 lakhs, being 15% of ₹ 260 lakhs has to be set apart (instead of ₹ 39.34 lakhs, being 15% of ₹ 262.25 lakhs)

(2) As per section 11 (6), where the cost of assets is claimed as application, no deduction for depreciation on such assets would be allowed in determining income of the trust for the purposes of application. Hence, as the cost of assets has been claimed as application of a income, no depreciation would be allowed on these assets while calculating income for the purpose of application.

(3) The land and building acquired for the purpose of expansion of hospital would be treated as application of income. The difference of ₹ 20 lakhs between the stamp duty value and cost of acquisition of land and building would not be taxable in the hands of Mathi Charitable Trust by invoking the provisions of sec. 56(2)(v), since sec. 56(2)(A) is not applicable when any sum of money or property is received by a trust registered u/s 12AA. Therefore, ₹ 120 lakhs would be considered as application of income.

(4) Donation made to Gandhiji Free Trust would be treated as application of income.

Question 12.
Agroha Education Institution was established u/s 10(23C)(iiiad) to impart and spread education. It earned net surplus during the P.Y. 201920 and 2020-21 ₹ 6 lakhs and 5 lakhs respectively. It claimed exemption u/s 10(23C)(iiiad).

The A.O. rejected the claim of exemption of the institution on the ground that the assessee had made profit and did not exist solely for the purpose of education.
Examine the validity of the view taken by the Assessing Officer. [CA Final Nov. 2018 (Old Syllabus)] [4 Marks]
Answer:
The issue under consideration is where an institution engaged in imparting education incidentally makes profit, would it lead to an inference that it ceases to exist solely for educational purposes.

The facts of the case are similar to the facts in Queen’s Educational Society v. CIT (2015), where the Supreme Court laid down the following tests to determine whether an educational institution exists solely for education purposes and not for purposes of profit:

(a) Where an educational institution carries on the activity of education primarily for educating persons, the fact that it makes a surplus does not lead to the conclusion that it ceases to exist solely for educational purposes and becomes an institution for the purpose of making profit;

(b) The predominant object test must be applied – the purpose of education should not be submerged by a profit making motive;

(c) A distinction must be drawn between the making of surplus and an institution being carried on “for profit”. MeTely because imparting of education results in making a profit, it cannot be inferred that it becomes an activity for profit;

(d) If after meeting expenditure, surplus arises incidentally from the activity carried on by the educational institution, it will not cease to be one existing solely for educational purposes. The ultimate test is whether on an overall view of the matter in the concerned assessment year, the object is to make profit as opposed to educating persons.

Applying the above rationale of Supreme Court in the present case, the view taken by the Assessing Officer to reject the claim of exemption of the institution on the ground that it did not exist solely for the purpose of education, only because it incidentally made some profits, is therefore, not correct.

Question 13.
Mani foundations, a charitable trust registered u/s 12AA of the Income-tax Act run schools for primary and secondary education. The following particulars pertaining to the P.Y. 2020-21 are furnished to you by the trust:

Compute the total income of the trust for the assessment year 2021-22 in order to avail maximum benefits within the four corners of law. [CA Final Nov. 2018 (New Syllabus)] [8 Marks]
Answer:

Notes:
(1) Only the anonymous donations in excess of the limit specified below would be subject to tax @ 30% under section 115BBC. The limit is the higher of the following:

• 5% of the total donations received by the assessee (5% × ₹ 25,00,000)
  = ₹ 1,25,000 or
• 1 lakh.

Therefore, Anonymous donation taxable @ 30% shall be ₹ 5,00,000 – ₹ 1,25,000 = ₹ 3,75,000.

Now, total donation is ₹ 25,00,000 of which taxable Anonymous do-nation is ₹ 3,75,000.

Thus, Donations (other than taxable anonymous donations) taxable at normal rate = ₹ 25,00,000 – ₹ 3,75,000 = ₹ 21,25,000.

Here, a view is taken that the amount of anonymous donations exempt from the applicability of 30% tax ₹ 1,25,000 in this solution is eligible for retention /accumulation to the extent of 15% as per sec. 11(1) without conditions in the same line as with other income and the voluntary contributions.

A contrary view may also be taken that such anonymous donations chargeable to tax at normal rates are not eligible for retention/accumulation to the extent of 15%. If this view is taken, ₹ 31,20,000, being 15% of ₹ 2,08,00,000 has to be set apart (instead of ₹ 34,38,750, being 15% of ₹ 2,29,25,000)

(2) As per Sec. 2(24)(xviii), assistance in the form of a subsidy received from the Central or State Government or any authority or body or agency shall be taxable.

(3) A trust running an educational institution shall not lose the benefit of exemption of any income under section 11 other than the value of benefits of educational facilities provided to the specified persons referred to in section 13(3), solely on the ground that such benefits have been provided to such persons. Therefore, exemption shall not be available in respect of t 5,00,000 being the amount applied for the benefit of the founder of the trust.

(4) As per Explanation 2 to Sec. 11(1), any amount credited or paid out of income to any trust registered u/s 10(23C) as a contribution with a specific direction that it shall be part of the corpus of the trust shall not be treated as application of income for charitable or religious purposes.

(5) The word “applied” used in section 11 does not necessarily imply , “spent”. Even if a certain amount is irretrievably earmarked and allocated for charitable purposes, the said amount can be deemed to have been applied for charitable purposes. [CIT v. Trustees of H.E.H. Nizams Charitable Trust (1981)(AP)]

(6) ₹ 25 lakhs, being excess of expenditure over income in the preceding financial year 2019-20 can be treated as application of income of the current year as held by Delhi High Court in Raghuvanshi Charitable Trust and others (2011).

(7) ₹ 5,00,000 applied for the benefit of the founder of the institution is taxable under section 12(2) read with section 13(l)(c)(d). This amount is taxable at the maximum marginal rate of 30% as per section 164(2).

Question 14.
Mr. Jayant and Mr. Basant, created, a trust, out of the insurance policy amount received upon the death of their father. The trust deed named Jayant and Basant as the trustees and Mrs. Kamla and Mrs. Vimla (Iheir sisters) as the beneficiaries. However, it is the discretion of the trustees that they may either accumulate the net incomeof the trust or pay the same to any one or both the beneficiaries. During the previous year 2020-21, the total income of the trust amounted to ₹ 10,50,000. You are required to discuss the relevant provisions of the Income-tax Act in this regard and calculate the tax payable by the trust, if any. What would be your answer if the trust was created under the ‘Will’ of the deceased father and such trust is the only trust so created under the ‘Will’? [CA Final May 2019 (Old Syllabus)] [4 Marks]
Answer:
The trust created by Mr. Jayant and Mr. Basant out of the insurance policy amount received upon the death of their father is a private discretionary trust, as it vests with the trustees a discretionary power to pay the beneficiaries, or accumulate the income, as the trustees think fit.

In case of a private discretionary trust, declared by a duly executed trust deed, where the shares of the beneficiaries are unknown, as in this case, the trustees, Mr. Jayant and Mr. Basant, would be liable as representative assessees.

Since the income of the trust does not include profits and gains of business, it is taxable at the maximum marginal rate of 35.88% [i.e., 30% + surcharge @ 15% + cess @ 4%]. The tax payable would be ₹ 3,76,740, being 35.88% of ₹ 10,50,000.

However, where the trust is created under the “Will” of the deceased father and such trust is the only trust so created under the “Will”, then, the income of the trust would be chargeable to tax as if it were the income of an association of persons.

Question 15.
Supporting the Girl Child, a charitable trust, is registered u/s 12A of the Act. On 1.4.2020, it got merged with M/s. Ananya P Ltd., which is a company engaged in manufacturing of stationery items. All the assets and liabilities of the erstwhile trust became the assets and liabilities of M./s. Ananya P Ltd who is not entitled for registration u/s 12AA of the Act. The trust appointed a registered valuer for the valuation of its assets and liabilities. From the following particulars (including the valuation report), calculate the tax liability in the hands of the trust arising as a result of such merger:

(i) Stamp duty value of land held ₹ 15 lakhs. However; if this land is sold in the open market, it would ordinarily fetch ₹ 17 lakhs. The book value of the land is ₹ 20 lakhs.
(ii) 75,000 equity shares in Idom Ltd. traded in Bombay Stock Exchange. The lowest price per share on 1.4.2020 was ₹ 75 and the highest price on that day was ₹ 85. The book value was ₹ 67 lakhs.
(iii) 55,000 preference shares held in Niharika Ltd. The shares will fetch ₹ 44 lakhs, if they are sold in the open market on 1.4.2020. Book value was ₹ 25 Lakhs.
(iv) Corpus fund as on 1.4.2020 ₹15 Lakhs.
(v) Outside liabilities ₹ 90 lakhs
(vi) Provision for taxation ₹ 5 lakhs.
(vii) Liabilities in respect of payment of various utility bills ₹ 6 lakhs. [CA Final May 2019 (Old Syllabus)] [8 Marks]
Answer:
As per section 11 STD, where in any previous year, a trust or institution registered u/s 12AA has merged with any entity other than an entity which is a trust or institution having objects similar to it and registered u/s 12AA, then, in addition to the income tax on the total income of such trust or institution, the accreted income of the trust or the institution shall be charged to additional tax at the MMR.

In this case, a trust registered u/s 12AA got merged with M/s. Ananya P Ltd. which is a company engaged in manufacturing of stationery items and therefore, the accreted income of trust would be chargeable to tax at maximum marginal rale @ 34.944% [30% plus surcharge @ 12% plus cess @ 4%].

Computation of accreted income and tax liability in the hands of the trust arising as a result of merger with Ananya Pvt. Ltd. for A.Y. 2021-22

Working Notes:

Question 16.
M/s Mahan Charitable Trust is running an Educational Institution with hostel facility for the orphan children. It is registered u/s I2AA. The details of Income and expenditure of the Trust are as given below:

(a) Voluntary contributions received during the year 150 lakhs.
This Includes:
(i) Corpus donation 20 lakhs
(ii) Donation of 20 lakhs from Mr. Michael a foreign donor which was received on 31-3-2021.
(b) Salary paid to teachers and administrative staff 40 lakhs.
(c) Other general expenses ₹ 10 lakhs Include payment to grocery stores of 30,000 by crossed cheque.
(d) A land belonging to the Trust In a nearby village which was purchased In the year 2015-16 for ₹ 5 lakhs was sold for ₹ 10.50 lakhs and another land adjacent to the Trust premises was purchased for ₹ 12 lakhs to be used as playground for the children.
(e) Five laptops costing ₹ 50,000 each were purchased during the year for teaching purposes.
(f) The Trust had accumulated ₹ 30 lalths u/s 11(2) In the fInancial year 2016-17 for constructing a school building. Amount spent for the said purpose till 31-3-202 1 was 27 lakhs. The project Is completed with a saving In project cost.
(g) Two additional rooms measuring 1,500 sq. ft each was constructed in the existing hostel for the children. Cost of construction is 1,200 per sq. ft.
(h) It made a corpus donation of 20 lakhs to a charitable trust registered u/s 12AA having similar objects.

Compute taxable income of Mahan Charitable Trust for A.Y. 2021-22. Support your answer with necessary working notes. [CA Final May 2019 (New Syllabus)] [8 Marks]
Answer:
Computation of Taxable income of Mahan Charitable Trust for the A.Y. 2021-22

Notes:
(1) Voluntary contributions made with a specified direction that they shall form part of the corpus of the trust or institution shall be exempt in the hands of trust u/s 11(1).

(2) For availing the benefit of Deemed application as per Explanation 2 to section 11(1), the person in receipt of income from the property held under trust, has to exercise the option in writing, before the expiry of the time allowed u/s 139( 1) to treat such income as deemed application of the year in which the income is earned.

(3) As per Explanation 3 to Sec. 11(1), for determining the amount of f application, the provisions of Sec. 40(a)( ia) and 40A(3) and 40A(3A), shall, mutatis mutandis, apply as they apply in computing the income chargeable under the head Profits and Gains of Business or Profession
In this case, payment to a grocery stores of ₹ 30,000 has been made by crossed cheque which shall be disallowed u/s 40A(3).

(4) As per Sec. 11(1A), where a capital asset held under trust is transferred and the whole of the net consideration is utilised for acquiring another capital asset, the whole of the capital gain arising from such transfer shall be deemed to have been applied to charitable or religious purposes. In this case, whole of the net consideration is utilised for purchase of land and therefore, whole of the capital gains shall be deemed to have been applied for charitable purposes.

(5) As per section 11 (6), where the cost of assets is claimed as application, no deduction for depreciation on such assets would be allowed in i determining income of the trust for the purposes of application. Hence, as the cost of new laptops and cost of constructing additional rooms has been claimed as application of income, no depreciation would be allowed on these assets while calculating income for the purpose of application.

(6) As per Explanation 2 to Sec. 11(1), corpus donation made to other Charitable Institution shall not be treated as application of income. Therefore, ₹ 20 lakhs of corpus donation to a charitable trust registered u/s 12AA shall not be treated as application of income.

Question 17.
The registration granted u/s 12AA of the Income Tax Act on 1.4.2011 to M/s S Charitable Trust, was cancelled on 31.1.2021 on a finding that the Trust was merged, with another entity neither having similar objects nor registered u/s 12AA. An appeal was preferred against the order of cancellation, which was dismissed by the Appellate authorities. The order confirming the cancellation was received on 31.3.2021.

The Balance Sheet of M/s S Charitable Trust as on 31.1.2021, and its other information is as given thereunder:

Additional Information:

1. Stamp duty value of the land (existing since 2009) as on 31.1.2021 was 120.00 lakhs but ¡f sold in the open market, the property would fetch ₹ 250 lakhs as per a registered valuer’s certificate.
2. Land and building (purchased in 2016), If sold in the open market will fetch ₹ 1,000 lakhs as per a registered valuer’s certificate. Stamp duty value as on 31.1.2021 was ₹ 1,050 lakhs.
3. The highest and lowest value per share of M/s X Ltd. traded on 31.1.2021 was 1,098 and 1,051 respectively.
4. Included in Sundry Creditors is 30 lakhs provided on estimated basis to contractors for which no bills are received.

Based on the above information, calculate the exit tax payable by the ; Charitable Trust and state the latest day on which the said tax has to be paid. Give working notes wherever necessary. [CA Final Nov. 2019 (Old Syllabus)] [8 Marks]
Answer:
As per section 115TD(1), where in any previous year, a trust or institution registered u/s 12AA has converted into any form which is not eligible for grant of registration u/s 12AA, then, in addition to the income tax on the total income of such trust or institution, the accreted income of the trust or the institution shall be charged to additional tax at the MMR.

Sec. 115TD(2) provides that the trust or an institution shall be deemed to have been converted into any form not eligible for registration u/s ; 12AA if the registration granted to it u/s 12AA has been cancelled.

In this case, the registration granted to M/s. S Charitable Trust u/s 12AA was cancelled on a finding that the Trust was merged, with another entity neither having similar objects nor registered u/s 12AA. Therefore, it shall 5 be deemed that it has been converted into any form not eligible for registration u/s 12AA and the accreted income of trust would be chargeableto tax at maximum marginal rate @ 34.944% [30% plus surcharge @ 12% plus cess @ 4%].

Computation of accreted income and tax liability in the hands of M/s S Charitable Trust arising as a result of cancellation of registration u/s 12AA for A.Y. 2021-22

As per Sec. 115TD(5), where registration granted to trust hr celled, the principal officer or the trustee of the trust and the trust shall be liable to pay the tax on accreted income to the credit of the Central Government within 14 days from the date on which the order in any appeal confirming the cancellation of the registration, is received by the trust. In this case, the order confirming the cancellation of registration was received on 31.03.2021 and therefore, the tax on accreted income shall be paid within 14 days from 31.03.2021 i.e. upto 14th April, 2021.

Working Notes:

Question 18.
GVB Charitable Trust engaged in the activities of running a charitable hospital and medical college since 8 years, has been merged with a Corporate hospital on 31st March, 2021. The said Corporate Hospital is not eligible for registration u/s 12AA of the Act. The position of assets and liabilities of the Charitable trust as on the date of merger are furnished as under:

Compare the tax liability, if any, of Charitable Trust, arising out of above merger, giving explanation for treatment of each item in the context of relevant provisions contained in the Act. Assume that the trust has no tax liability in respect of other activities undertaken during previous year 2020-21. [CA Final Nov. 2019 (New Syllabus)] [8 Marks]
Answer:
As per section 115TD, where in any previous year, a trust or institution registered u/s 12AA has merged with any entity other than an entity which is a trust or institution having objects similar to it and registered u/s 12AA, then, in addition to the income tax on the total income of such trust or institution, the accreted income of the trust or the institution shall be charged to additional tax at the MMR.

In this case, a trust engaged in the activities of running a charitable hospital and medical college got merged with a Corporate Hospital not eligible for registration u/s 12AA therefore, the accreted income of trust would be chargeable to tax at maximum marginal rate (a 34.944% [30% plus surcharge @ 12% plus cess @ 4%].

Computation of accreted income and tax liability in the hands of the trust arising as a result of merger for A.Y. 2021-22

Working Notes:

Expenditure on Exempt Income – CA Final DT Question Bank is designed strictly as per the latest syllabus and exam pattern.

Expenditure on Exempt Income – CA Final DT Question Bank

Question 1
Explain in brief, the treatment as to the taxability and / or allowability, under the provisions of Income-tax Act. 1961:

‘A’ Ltd., an investment company, received dividend income of ₹ 1,00,000 on its investment in shares. It incurred interest expenditure of ₹ 2,00,000 on the borrowed capital utilized in the investment of shares. [CA Final May 2010] [4 Marks]
Answer:
As per Sec. 14A(1), no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to incomes which do not form part of total income under this Act. Since, dividend income is exempt u/s 10(34), interest paid on borrowed capital used for investment in shares shall not be allowed as deduction.

Even, if the dividend income exceeds ₹ 10,00,000 and becomes taxable u/s 115BBDA, interest on borrowed capital shall be disallowed, since sec. 115BBDA provides that no deduction in respect of any expenditure shall be allowed to the assessee under any provision of this Act in computing the income by way of such dividends.

Question 2.
Mr. W has provided the following information regarding his income and expenditure for the year 2020-21:

	₹
Income from business (computed)	5,00,000
Tax free interest	1,25,000
Share of profit from firm	85,000
Expenses in respect of tax free interest	15,000
Interest expenditure relating to both taxable and non-taxable income	2,25,000

Annual average of the monthly averages of opening and closing balances of the value of investment, income from which does not or shall not form part of the total income is ₹ 4,00,000.

Mr. W claims that no expenditure was incurred by him for exempt income earned. The Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of expenditure in relation to exempt income.

You are required to compute the amount of expenditure incurred in relation to exempt income and resultant total income, assuming that Mr. W has no other income. [CA Final May 2012] [6 Marks]
Answer:
As per section 14A, no deduction shall be allowed in respect of | expenditure incurred by the assessee in relation to income which does not form part of total income. Thus, any expenditure made for the purposes of earning an exempt income, shall be ignored.

Further, the section also empowers the Assessing officer to determine the amount of expenditure incurred in relation to such income which does not form part of total income under this Act in accordance with such method  as may be prescribed (See Rule 8D below), if the A.O., having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure.

Rule 8D provides .the following ‘Method for Determining Amount of Expenditure In Relation To Income Not Includible in Total Income:
Expenditure directly relating to the exempt income:
Expenses in respect of tax free interest = ₹ 15,000
1 % of average value of investment (income of which is exempt) disallowed:
1% of average value of investment = ₹ 4,00,000 × 1% = ₹ 4,000
Total Amount of Expenditure disallowable under section 14A (read with Rule 8D)
= ₹ 15,000 + ₹ 4,000
= ₹ 19,000
Computation of Total Income of Mr. W for A.Y. 2021-22
Income from Business (Computed) – ₹5,00,000
Add: Expenditure disallowed u/s 14A – ₹ 19,000
Total Income – ₹ 5,19,000
Notes: Share of profit from firm is exempt u/s 10(2).

Question 3.
Radhakrishna Cooperative Society, the assessee is engaged in marketing of fertilizers and purchase and processing of seeds. The assessee had claimed deduction u/s 80P(2)(d) on dividend income received from NAFED and one Co-operative bank and also on interest on deposits with Co-operative banks. The A.O. contended that the aforesaid income were not included in the total income and wants to invoke section 14A by disallowing the expenditure incurred with respect to earning income which is not liable to income tax. Discuss whether the action taken by the Assessing Officer is tenable in law. [CA Final Nov 2017, May 2010] [4 Marks]
Answer:
Issue involved: The issue under consideration is whether section 14A is applicable in respect of deductions, which are permissible and allowed under Chapter VI-A.

Provisions applicablerSec. 14A(1) provides that for the purposes of computing the total income, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to incomes which do not form part of total income under this Act. Thus, any expenditure made for the purposes of earning an exempt income, shall be ignored.

Analysis: The facts of the case are similar to the facts in CIT v. Kribhco (2012) (Delhi) wherein the Delhi High Court observed that section 14A is no applicable for deductions, which are permissible and allowed under Chapter VIA. The words “do not form part of the total income under this Act” used in section 14A are significant and important. Income which qualifies for deductions under sections 80C to 80U has to be first included in the total income of the assessee and then allowed as a deduction. However, income referred to in Chapter III (i.e. section 10 to section 13B) do not form part of the total income and therefore, as per section 14A, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to such income which does not form part of the total income.

The Delhi High Court, therefore, held that no disallowance can be made under section 14A in respect of income included in total income in respect of which deduction is allowable under sections 80C to 80U.

Conclusion: Thus, applying the rationale of the Delhi High Court ruling to s the present case no disallowance can be made under section 14A in respect : of dividend income received by the Radhakrishna Cooperative Society as such income is allowed as deduction under section 80P(2)(d). Hence action taken by the A.O. is not tenable in law.

Prevention of Oppression and Mismanagement – CA Final Law Study Material is designed strictly as per the latest syllabus and exam pattern.

Prevention of Oppression and Mismanagement – CA Final Law Study Material

Question 1.
State the conditions which must be satisfied before filing an application for the prevention of oppression.
Answer:
Conditions to be satisfied before filing an application for prevention of oppression:
The conditions which are required to be satisfied before filing an application for the prevention of oppression can be enumerated as follows:
(i) Required number of members: As per Sec. 244 of Companies Act, 2013, in the case of a company having a share capital, not less than 100 members of the company or not less than 1/10th of the total number of its members, whichever is less, or any member or members holding not less than 1/10th of the issued share capital of the company, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares, shall have the right to apply u/s 241.
In case of a company not having share capital, atleast 1/5th of the total number of its members can apply for relief.

(ii) Complaints against which application may be made by members to Tribunal:
Any member of a company may apply to Tribunal, if he complains that –

(a) the affairs of the company have been or are being conducted in a manner prejudicial to public interest or prejudicial or oppressive to him or any other member or members or prejudicial to the interests of the company; or

(b) the material change has taken place in the management or control of the company, whether by an alteration in the Board of Directors, or manager, or in the ownership of the company’s shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to its interests or its members or any class of members.

Question 2.
The profits of ABC Limited for the financial year 2019-2020 fell considerably due to recession. The Board of directors of the company, therefore, bona fide did not recommend any dividend for the year. At the Annual General Meeting of the company, a group of members objected to the Board’s decision and wanted the Board to make recommendation for dividend.

On refusal by the Board, the members, who feel oppressed by the Board’s decision to skip the dividend, move to the Tribunal and complain against the Board on the ground of oppression and mismanagement.
Examining the provisions of the Companies Act, 2013, decide:
(a) Whether the members contention shall be tenable?
(b) Whether the act of Board of Directors not to recommend any dividend shall amount to oppression and mismanagement?
Answer:
Oppression and Mismanagement:

• Terms Oppression and Mismanagement has not been defined under the Company law.
• Oppression involves an element of lack of fair dealing to the member of his propriety rights as shareholder.
• Oppression does not include mere domestic disputes between directors and members, or lack of confidence between one set of members and others.
• Bona fide decisions consistent with the company’s memorandum and articles are not to be equated with mismanagement even if they turn out to be wrong in the circumstances or these cause temporary losses.
• Directors’ bona fide decision not to declare dividend and to accumulate available profits into reserves is not mismanagement. (Thomas Vettom (V.J.) v. Kuttanad Rubber Co. Ltd.)
• In the present case, due to fall in profits, Board of directors of the company, did not recommend any dividend for the year. At the AGM of the company, a group of members objected to the Board’s decision and wanted the Board to make recommendation for dividend.
• On refusal by the Board, the members, who feel oppressed by the Board’s decision to skip the dividend, move to the Company Law Board and complain against the Board on the ground of oppression and mismanagement.

Conclusion:
(a) Contention of members shall not be tenable.
(b) The act of the Board of directors who acted bonafide, not to recommend any dividend shall not amount to oppression or mismanagement.

Question 3.
A group of shareholders holding 20% of the issued share capital of DEF Limited have filed a petition before the Tribunal alleging the following:
(i) Various acts of illegal, invalid and irregular transactions entered into the name of the company.
(ii) Losses Incurred due to mismanagement by the board of directors.
(iii) Non-declaration of dividend despite having sufficient profits In the past years.
Examine the merits of the above petitions made under section 241 of the Companies Act 2013 in the light of the judicial pronouncements made in this regard. [May 17(4 Marks)]
Answer:
Oppression and Mismanagement:

As per Sec. 244 of the Companies Act, 2013, in the case of a company having a share capital. not less than loo members of the company or not less than 1/10th of the total number of its members, whichever is less, or any member or members holding not less than 1/10th of the issúed share capital of the company, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares, shall have the right to apply u/s 241.

In the instant case, group holds 2O°/f the issued share capital, hence, they are entitled to file a petition before the Tribunal u/s 241 of the Companies Act, 2013.

Validity of Grounds on which petition is being filed:

(i) Mere illegal, invalid or irregular transactions entèred into in the name of the company do not constitute a ground for invoking the provisions óf section 241 unless it is proved that they are oppressive to any shareholder or prejudicial to the interest of the company or to the public interest. (Sheth Mohanlal Ganpatram v. Shri Sayaji jubilee Cotton and jute Mills Company Ltd.)

(ii) Losses incurred due to mismanagement by the board of directors, cannot, by itself, be regarded as oppression (Ashok Betelnut Co. R Ltd. y. M.L Chandrakanth).

(iii) Directors’ bonaJìde decision not to declare dividend and to accumulate available profits into reserves is not mismanagement. (Thomas Vettom (VI.) y. Kuttanad Rubber Co. Ltd.).

Conclusion: Petition filed by the group of shareholders will fail unless they can prove to the satisfaction of the Tribunal that the acts complained of in the petition are oppressive and prejudicial to the interest of the company and the public interest.

Question 4.
What is meant by oppression? State whether the aggrieved party would succeed in obtaining relief from Tribunal on the ground of oppression in the following cases:
(a) The majority of the Board of directors override the minority directors and the minority directors apply to Tribunal complaining oppression by majority directors.
(b) A petition by majority shareholders complaining oppression by minority shareholders. Give your answer according to the provisions of the Companies Act, 2013.
Answer:
Meaning of Oppression:

Term Oppression has not been defined under the Company law. Oppression involves an element of lack of fair dealing to the member of his propriety rights as shareholder.

Oppression does not include mere domestic disputes between directors and members, or lack of confidence between one set of members and others. It was observed in Rao (V.M.) v. Rajeshwari Ramakrishnan that the oppression complained off must affect a person in his capacity as a member of the company; harsh or unfair treatment in other capacity, e.g., as a director or a creditor is outside the purview of this chapter.

There must be a continuous act constituting oppression up to the date of the petition. The events have to be considered not in isolation but as a part of a continuous suffering.

(i) Oppression of a member as a director: Oppression dealt with by Sec. 241 of the Companies Act, 2013, is only oppression of members in their character as such. The harsh treatment, for instance, of a member who is a director or other officer or employee, by the Board of directors or management does not come within Sec. 241.
Conclusion: The minority directors will not succeed in getting relief from Tribunal on the ground of oppression.

(ii) ’Right not confined to minority: As per Sec. 244, the right to apply for relief u/s 241/242 is given to 100 members or 1/10th of the total number of members or any member or members holding not less than 1/10th of the issued share capital of the company. There is nothing in this section which suggests even indirectly that unless the application is made by minority shareholders it is not maintainable. The right to apply is, therefore, not confined to oppressed minority of the shareholders alone.

Question 5.
ABC Private Limited is a company in which there are eight shareholders. Can a member holding less than one-tenth of the share capital of the company apply to the Tribunal for relief against oppression and mismanagement? Give your answer according to the provisions of the Companies Act, 2013.
Answer:
Members right to apply for relief against oppression and mismanagement:

As per Sec. 244 of Companies Act, 2013, in the case of a company having a share capital, not less than 100 members of the company or not less than 1/10th of the total number of its members, whichever is less, or any member or members holding not less than 1/10th of the issued share capital of the company, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares, shall have the right to apply u/s 241.

In the given case, there are eight shareholders. As per above conditions, 10% of 8 i.e. 1 member can present a petition to the Tribunal, regardless of the fact that he holds less than 1/10th of the company’s share capital.
Conclusion: A single member can apply for relief against oppression and mismanagement.

Question 6.
The issued and paid up capital of MNC Limited is ₹ 5 crores consisting of 5,00,000 equity shares of ₹ 100 each. The said company has 500 members. A petition was submitted before the Tribunal signed by 80 members holding 10,000 equity shares of the company for the purpose of relief against oppression and mismanagement by the majority shareholders.
Examining the provisions of the Companies Act, 2013, decide whether the said petition is maintainable. Also explain the impact on the maintainability of the above petition, if subsequently 40 members, who had signed the petition, withdrew their consent. [MTP-April 18, RTP-May 18, MTP – March 19]
Answer:
Validity of Petition filed for relief against oppression and mismanagement:

As per Sec. 244 of Companies Act, 2 013, in the case of a company having a share capital, not less than 100 members of the company or not less than 1/10th of the total number of its members, whichever is less, or any member or members holding not less than 1/10th of the issued share capital of the company, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares, shall have the right to apply u/s 241.

In the present case, petition was signed by 80 members out of 500 members. Group of Applicant hold 10,000 shares out of 5,00,000 shares.

Conclusion: Petition made by 80 members meets the eligibility criteria specified u/s 244 of the Companies Act, 2013 as group of applicants consist of 80 members which is more than 1/10th of total 500 members. Therefore, the petition is maintainable.

Impact of subsequent withdrawal of consent: It has been held by the Supreme Court in Rajmimdhry Electric Corporation v. V. NageswarRao, that if some of the consenting members have subsequent to the presentation of the petition withdraw their consent, it would not affect the right of the applicant to proceed with the petition. Hence petition remains maintainable.

Question 7.
A group of members of XYZ Limited has filed a petition before the Tribunal alleging various acts of oppression and mismanagement by the majority shareholders of the company. The Petitioner group holds 12% of the issued share capital of the company.

During the pendency of the petition, some of the petitioner group holding about 5% of the issued share capital of the company wish to disassociate themselves from the petition and they along with the other majority shareholders have submitted before the Tribunal that the petition may be dismissed on the ground of non- maintainability. Examine their contention having regard to the provisions of the Companies Act, 2013. [MTP-May 20]
Answer:
Dismissal of petition on grounds of non-maintainability:

As per Sec. 244 of Companies Act, 2013, in the case of a company having a share capital, not less than 100 members of the company or not less than l/10th of the total number of its members, whichever is less, or any member or members holding not less than 1 /10th of the issued share capital of the company, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares, shall have the right to apply u/s 241.

It has been held by the Supreme Court in Rajmimdhry Electric Corporation v. V. Nageswar Rao, that if some of the consenting members have subsequent to the presentation of the petition withdraw their consent, it would not affect the right of the applicant to proceed with the petition.

Conclusion: Petition is maintainable as it is signed by requisite number of members. Subsequent withdrawal will not have any impact.

Question 8.
M/s DJ Limited, a listed company, as per the audited financial statements as at March 31, 2018 is having issued and paid-up equity share capital comprising of 10 lakhs share of ₹ 10 each and issued and paid-up preference share capital of 5 lakhs share of ₹ 10 each respectively. The members of the company after complying with the provisions of Sec. 169 of the Companies Act, 2013 removed one Mr. Satish from the directorship of the company on 1st August 2018 before the completion of his term of office.

Mr. Satish is also one of the members of the company holding 110000 fully paid-up equity shares. Mr. Satish has alleged oppression on his removal and has moved the jurisdictional Honorable National Company Law Tribunal (NCLT) u/s 241 read with Section 244 of the Companies Act, 2013. The Board of Directors of the company is of the opinion that the application is not maintainable as per the provisions of Section 244 of the Companies Act, 2013 Decide.
Also, state if any other recourse that is available with Mr. Satish under the provisions of the Companies Act, 2013. [Nov. 18 – Old Syllabus (4 Marks), KTP-May 19]
Answer:
Validity of Petition filed for relief against oppression and mismanagement:

As per Sec. 244 of Companies Act, 2013, in the case of a company having a share capital, not less than 100 members of the company or not less than 1/10th of the total number of its members, whichever is less, or any member or members holding not less than 1/10th of the issued share capital of the company, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares, shall have the right to apply u/s 241.

However, the Tribunal may, on an application made to it in this behalf, waive all or any of the requirements specified above so as to enable the members to apply under section 241.

In the instant case, total issued share capital consists of 15 lakhs shares. The members of the company after complying with the provisions of Sec. 169 of the Companies Act, 2013 removed

one Mr. Satish from the directorship of the company on 1st August 2018 before the completion of his term of office. Mr. Satish is also one of the members of the company holding 110000 fully paid-up equity shares. Mr. Satish has alleged oppression on his removal and has moved the jurisdictional Honorable NCLT u/s 241 read with Section 244 of the Companies Act, 2013.

Share capital of Mr. Satish (1.1 Lakh Shares) is less than 1/10th of total issued share capital (15 Lakh Shares).
Conclusion: Petition is not maintainable as shares held by Mr. Satish is less than 1/10th of issued share capital of the company. However, as per proviso to section 244(1), Mr. Satish may make an application to the Tribunal in this behalf for the waiver of the above condition so that he may apply under section 241.

Question 9.
MNC Private Ltd. is a Company in which there are six shareholders. Mr. Srinath, who is a director and also the legal representative of a deceased shareholder holding less than one tenth of the share capital of the company made a petition to the Tribunal for relief against oppression and mismanagement. Examine under the provisions of the Companies Act, 2013 whether the petition made by Mr. Srinath is valid and maintainable? [Nov. 18 – New Syllabus (3 Marks)]
Answer:
Validity of Petition filed for relief against oppression and mismanagement:

As per Sec. 244 of Companies Act, 2013, in the case of a company having a share capital, not less than 100 members of the company or not less than 1/10th of the total number of its members, whichever is less, or any member or members holding not less than 1/10th of the issued share capital of the company, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares, shall have the right to apply u/s 241.

In the present case, application is made by Mr. Srinath, who is a director and also the legal representative of a deceased shareholder holding less than one tenth of the share capital of the company. There are six shareholders. As per above conditions, 10% of 6 i.e. 1 member can present a petition to the Tribunal, regardless of the fact that he holds less than 1/10th of the company’s share capital.

It is also well settled principle that where a member dies and his name being still in the register of members, his legal representatives are entitled to make an application for prevention of oppressional and mismanagement even if their names are not yet entered in the register of members.
Conclusion: Petition made by Mr. Srinath is valid and maintainable.

Question 10.
A group of shareholders consisting of 30 members decide to file a petition before the Tribunal for relief against oppression and mismanagement by the Board of Directors of M/s. Aravalli Manufacturing Company Limited having a paid-up Share Capital of Rs. 1 crore.

The company has a total of 500 members and the group of 30 members holds one-tenth of the total paid-up share capital accounting for one-fifteenth of the issued share capital. The grievance of the group is that due to the mismanagement by the Board of Directors, the company is incurring losses and has not declared any dividend for the past five years. In the light of the provisions of the Companies Act, 2013, please advise the group of shareholders regarding the admission of the petition and relief thereof. [May 19 – New Syllabus (4 Marks)]
Answer:
Validity of Petition filed for relief against oppression and mismanagement:

As per Sec. 244 of Companies Act, 2013, in the case of a company having a share capital, not less than 100 members of the company or not less than l/10th of the total number of its members, whichever is less, or any member or members holding not less than 1 /10th of the issued share capital of the company, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares, shall have the right to apply u/s 241.

In the present case, application is being sought by a group of shareholders consisting of 30 members out of 500 members. Group holds one-tenth of the total paid-up share capital accounting for one-fifteenth of the issued share capital.

Conclusion: Since the group of shareholders do not number loo or hold 1/10th of the issued share capital or constitute 1/10th of the total number of members, they have no right to approach the Tribunal for relief.

As regards obtaining relief from Tribunal, continuous losses cannot, by itself, be regarded as oppression. Similarly, failure to declare dividends or payment of low dividends also does not amount to oppression. Thus, the shareholders may not succeed in getting any relief from Tribunal.

Question 11.
Arctic Refrigerators Limited has got 5000 shareholders. Some of the members have decided to file an application under Sec. 241 of the Companies Act, 2013, for oppression and mismanagement. Discuss the qualification of members who have the right to apply to the tribunal.

Due to the fresh Issue of shares, the shareholding of the members who filed the petition gets reduced to below required % of the paid-up share capital. The main contention in the petition is challenging the validity of the Issue. Is the petition maintainable? Mr. Dina, one of the directors also, wants to file an application for oppression and mismanagement. Can he do so? [Nov 20- Old Syllabus (4 Marks))
Answer:
Validity of Petition flied for relief against oppression and mismanagement:

As per Sec. 244 of Companies Act, 2013, in the case of a company having a share capital, not less than loo members of the company or not less than 1/10th of the total number of its members, whichever is less, or any member or members holding not less than 1/10th of the issued share capital of the company, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares, shall have the right to apply u/s 241.

It has been held by the Supreme Court in Rajmundhry Electric Corporation vs. V. Nageswar Rao, that if some of the consenting members have subsequent to the presentation of the petition withdraw their consent, it would not affect the right of the applicant to proceed with the petition.

Applying the same principle, if due to the fresh issue of shares, the shareholding of the members who filed the petition gets reduced to below required % of the paid-up share capital, it would not affect the maintainability of the petition.

Filing of Application for relief against oppression by a director: Oppression dealt with by Sec. 241 of the Companies Act, 2013, is only oppression of members in their character as such. The harsh treatment, for instance, of a member who is a director or other officer or employee, by the Board of directors or management does not come within Sec. 241.

Question 12.
ABC limited used the business resources of the company in favour of the majority shareholders and completely excluded the minorities from the affairs of the company. As of consequences, minority members filed an application to Tribunal to look into the matter on the regulation of conduct of affairs of the company in future. State in the light of the Companies Act, 2013, the action to be taken by the Tribunal in the given situation.
Answer:
Action to be taken by Tribunal:
As per Sec. 242 of the Companies Act, 2013, on any application made u/s 241, the Tribunal may, with a view to bring to an end the matters complained of, make such order as it thinks fit, if it is of the opinion:

(a) that the company’s affairs have been or are being conducted in a manner

• prejudicial or oppressive to any member or members or
• prejudicial to public interest or
• prejudicial to the interests of the company;

and

(b) that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound up.

Interim Order: The Tribunal may, on the application of any party to the proceeding, make any interim order which it thinks fit for regulating the conduct of the company’s affairs upon such terms and conditions as appear to it to be just and equitable.

Question 13.
Mr. B. Dutt is the Managing Director of Food Plaza Restaurants Private Limited (FPRPL). FPRPL was incorporated in furtherance of a Joint Venture Agreement (“JVA”) between Mr. B. Dutt and Jack India Pvt. Limited (JIPL) in 2017, both having 50% of equal share in the said company. FPRPL was to be governed by the terms and conditions set out in its Memorandum of Association and its Articles Dissociation.

During the course, JIPL held the Board meeting, without giving prior notice of such meeting to Mr. B. Dutt, took decision to remove Mr. B Dutt with an allegation of mismanagement of fund in FPRPL.
JIPL pressurised him to sell his shares at ₹ 5 Crores, against ₹ 15 crore which is much below the fair market price of Mr. B. Dutt shares.

Advise whether Mr. B. Dutt has right to claim any relief and would he succeed in obtaining relief from Tribunal on the ground of oppression by JIPL? [MTP-Aug. 18]
Answer:
Member’s right to apply for relief against oppression and mismanagement

As per Sec. 244 of Companies Act, 2013, in the case of a company having a share capital, not less than 100 members of the company or not less than 1/10th of the total number of its members, whichever is less, or any member or members holding not less than 1/10th of the issued share capital of the company, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares, shall have the right to apply u/s 241.

In the instant case, Mr. Dutt is managing director and holding 50% equity shares of the company. Other Shareholder (JIPL) held the Board meeting, without giving prior notice of such meeting to Mr. B. Dutt, took decision to remove Mr. B Dutt with an allegation of mismanagement of fund in FPRPL. JIPL pressurised Mr. B Dutt to sell his shares at ₹ 5 Crores, against ₹ 15 crore which is much below the fair market price of Mr. B. Dutt shares.

The act of JIPL to remove Mr. B Dutt, a Managing director from FPRPL and pressurizing him to sell his shares much below the fair market price is an act of oppression. Mr. B Dutt was not given prior notice of board meeting and no chance to disprove the false allegations made against him.

Conclusion: Mr. B Dutt has right to apply to the Tribunal u/s 241.

Tribunal is well within its power u/s 242 to pass appropriate orders as to reappointment of Mr. B Dutt as the Managing director of the company and can also issue orders for the future conduct of the company along with provision of just and equitable relief to the applicant.

Question 14.
M/s Sunshine Oils Limited, a listed company as at 31st March, 2018 as per the audited financial ; statements is having 200 depositors with ₹ 50 Crores of deposit in the company. Out of the total 200 depositors 20 depositors of the company have formed a group and have appointed Mr. Ram (a practicing advocate who is not one of the depositor) as their representative to file an application in the National Company Law Tribunal (NCLT) to bring a Class Action suit against the management and conduct of affairs of the company are being conducted in a manner which is prejudicial to the ‘ interest of the depositors being oppressive.

Will the application of Mr. Ram be admitted by the ‘ Honourable Tribunal. Discuss with reference to the provisions of the Companies Act, 2013? [May 18 – Old Syllabus (4 Marks)]
Answer:
Validity of Application to bring a class action suit:

Sec. 245 (3)of the Companies Act, 2013 prescribes the required number of members or depositors to apply for class action suit. Accordingly, the requisite number of depositors to file an application shall not be less than 100 depositors or not less than such percentage of the total number of depositors as may be prescribed, whichever is less. No such percentage is being prescribed.

The requisite number of depositor or depositors to file an application u/s 245(1) shall be:
(a) 5% of the total number of depositors of the company; or 100 depositors of the company, whichever is less; or
(b) depositor or depositors to whom the company owes 5% of total deposits of the company.

As per Sec. 432, a party to any proceeding or appeal before the Tribunal or Appellate Tribunal as the case may be, may appear in person or authorize one or more Chartered Accountant or Company Secretaries or Cost Accountants’ or legal practitioners or any other person to present his case before the Tribunal or Appellate Tribunal as the case may be.

Sec. 245(10) states that subject to the compliance of this section, an application may be filed or any other action may be taken under this section by any person, group of persons or any association of persons representing the persons affected by any act or omission.

In the instant case, 20 depositors out of 200 depositors have formed a group and have appointed Mr. Ram (a practising Advocate who is not one of the depositors) as their representative to bring a class action suit against the management of the Company.

Conclusion: Application need to be admitted by the Tribunal as it satisfies the eligibility criteria. Mr. Ram can file application on behalf of depositors.

Question 15.
A group of depositors in M/s. Bright Limited, a listed company, appointed Mr. Fair, an advocate as a representative to file an application in the National Company Law Tribunal (NCLT) on the behalf of the depositors to bring a Class Action suit against the management of the company as they are of the opinion that the management and conduct of affairs of the company are being conducted in a manner which is prejudicial to the interest of the depositors being oppressive.

Examine in the given situation, whether the appointment of Mr. Fair is valid as regards to the filling of the application before the Tribunal in the light to the provisions of the Companies Act, 2013? [RTP-Nov. 18]
Answer:
Validity of Application to bring a class action suit:

Sec. 245 (3) of the Companies Act, 2013 prescribes the required number of members or depositors to apply for class action suit. Accordingly, the requisite number of depositors to file an application shall not be less than 100 depositors or not less than such percentage of the total number of depositors as may be prescribed/whichever is less. No such percentage is being prescribed.

As per Sec. 432, a party to any proceeding or appeal before the Tribunal or Appellate Tribunal as the case may be, may appear in person or authorize one or more Chartered Accountant or Company Secretaries or Cost Accountants or legal practitioners or any other person to present his case before the Tribunal or Appellate Tribunal as the case may be.

Sec. 245(10) states that subject to the compliance of this section, an application may be filed or any other action may be taken under this section by any person, group of persons or any association of persons representing the persons affected by any act or omission.

In the instant case, a group of depositors appointed Mr. Fair an Advocate as their representative to bring a class action suit against the management of the Company.

Conclusion: Appointment of Mr. Fair is valid and application of Mr. Fair who is a representative of depositors, will be admitted by the Hon’ble Tribunal, provided, the requirement of minimum number of members filing the application is fulfilled.

Question 16.
Agroup of members holding 380 lakh issued share capital in Zolo Ltd., a listed public company having total issued share capital of 15,000 lakhs as per latest financial statements alleged that company board of director is conducting an act which is beyond the scope of the articles or memorandum of the company without altering the memorandum or articles of the company. They make application to tribunal (NCLT) to restrain the company from doing such an act. With reference to the provision of Companies Act, 2013 ascertain whether the application will be admitted by tribunal (NCLT). [MTP-Oct. 20]
Answer:
Validity of Application to bring a class action suit:

Sec. 245 of Companies Act, 2013 provides that specified number of member or members, may, if they are of the opinion that the management or conduct of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members, file an application before the Tribunal on behalf of the members for seeking an orders, to restrain the company from committing an act which is beyond the scope of or ultra-vires the articles or memorandum of the company.

Requisite number of members to make Application u/s 245(1) for Class Action for members is as prescribed in Rule 84(3) of the NCLT Rules, 2016. Accordingly, in case of a company having a share capital the requisite number of member or members to file an application u/s 245(1) shall be: –
(a) at least 5% of the total number of members of the company; or 100 hundred members of the company, whichever is less; or
(b) In case of a listed company, member or members holding not less than 2% of the issued share capital of the company.

In the given case, members hold 2.53% (380/15000*100) of issued share capital of Zolo Ltd. which is a listed company make application before tribunal (NCLT).

Conclusion: Application can be admitted by NCLT as requirement of number ofmembers holding not less than 2% of issued share capital is complied with.

Portfolio Management – CA Final SFM Study Material is designed strictly as per the latest syllabus and exam pattern.

Portfolio Management – CA Final SFM Study Material

Part – 1 (Theory)

Question 1.
Discuss the various kinds of Systematic and Unsystematic risk? [Practice Question]
Answer:
There are two types of risk – systematic (or non-diversifiable) and un-systematic (or diversifiable) relevant for investment – also, called as general and specific risk.

Types of Systematic Risk:
i. Market risk: Even if the earning power of the corporate sector and the interest rate structure remain more or less unchanged, prices of securi-ties, equity shares in particular, tend to fluctuate. Major cause appears to be changing psychology of the investors. The irrationality in the security markets may cause losses unrelated to the basic risks. These losses are the result of changes in the general tenor of the market and are called market risks.

ii. Interest Rate Risk: The change in the interest rate has a bearing on the welfare of the investors. As the interest rate goes up, the market price of existing fixed income securities falls and vice versa. This happens because the buyer of a fixed income security would not buy it at its face value if its interest rate is lower than the prevailing interest rate on a similar security.

iii. Social or Regulatory Risk: The social or regulatory risk arises, where an otherwise profitable investment is impaired as a result of adverse legislation, harsh regulatory climate, or in extreme instance nationalization by a socialistic government.

iv. Purchasing Power Risk: Inflation or rise in prices lead to rise in costs of production, lower margins, wage rises and profit squeezing etc. The return expected by investors will change due to change in real value of returns.

Types of Unsystematic Risk:
i. Business Risk: As a holder of corporate securities (equity shares or debentures) one is exposed to the risk of poor business performance. This ” may be caused by a variety of factors like heightened competition, emergence of new technologies, development of substitute products, shifts in consumer preferences, inadequate supply of essential inputs, changes in government policies etc. But quite often the principal factor may be inept and incompetent management.

ii. Financial Risk: This relates to the method of financing, adopted by the company, high leverage leading to larger debt servicing problem or short term liquidity problems due to bad debts, delayed receivables and fall in current assets or rise in current liabilities.

iii. Default Risk: Default risk refer to the risk accruing from the fact that a borrower may not pay interest and/or principal on time. Except in the

Question 2.
Discuss the capital Asset pricing Model (CAPM) and its relevant assumptions [May 2018] [5 marks]
Answer:
Capital Asset Pricing Model: The mechanical complexity of the Markowitz’s Portfolio model kept both practitioners and academics away from adopting the concept for practical use. Its intuitive logic, however, spurred the creativity of a number of researchers who began examining the stock market implications that would arise if all investors used this model. As a result what is referred to as the Capital Asset Pricing Model (CAPM), was developed.

The capital Asset pricing model was developed by Sharpe, Mossin and Lintner in 1960. The model explains the relationship between the expected return, non-diversifiable risk and the valuation of securities. It considers the required rate of return of a security on the basis of its contribution to total risk. It is based on the premise that the diversifiable risk of a security is eliminated when more and more securities are added to the portfolio. However, the systematic risk cannot be diversified and is or related with that of the market portfolio. As per CAPM,
Expected return on security = R_f + Beta (R_m – R_f).

Assumptions of CAPM:

• The investor’s objective is to maximize the utility of terminal wealth.
• Investors make choices on the basis of risk and return.
• Investors have identical time horizon.
• Investors have homogenous expectations of risk and return.
• Information is simultaneously and freely available to all investors.
• There are no taxes, transaction costs, restrictions on short sales or other market imperfections.
• Total asset quality is fixed and all assets are marketable and divisible.

Question 3.
Explain the three form of Efficient Market Hypothesis. [Practice Question]
Answer:
The Efficient Market Hypothesis (EMH) is concerned with speed with which information affects the prices of securities. As per the study carried out by the technical analysts, it was observed that information is slowly incorporated in the price and it provides an opportunity to earn excess profit. However, once the information is incorporated then investor can not earn this excess profit.
Level of Market Efficiency: If price reflects all information, it is the highest order of market efficiency.

According to FAMA, there exist three levels of market efficiency:-

• Weak form efficiency – Price reflect all information found in the record of past prices and volumes.
• Semi – strong efficiency – price reflect not only all information found in . the record of past prices and volumes but also all other publicly available information.
• Strong form efficiency – price reflect all available information public as well as private.

Question 4.
Explain the different challenges to Efficient Market Theory. [Practice Question]
Answer:
Some of the major challenges to efficient market theory are:
a. Information Inadequacy: Information is neither freely available nor rapidly transmitted to all participants in the stock market. There is a calculated attempt by many companies to circulate misinformation.

b. Limited information processing capabilities: Human information processing capabilities are sharply limited. According to Herbert Simon every human organism lives in an environment which generates millions of new bits of information every second but the bottle necks of the perceptual apparatus does not admit more than thousand bits per second and possibly much less.
David Dreman maintained that under conditions of anxiety and uncertainty, with a vast interacting information grid, the market can become a giant.

c. Irrational Behaviour – It is generally believed that investors’ rationality will ensure a close correspondence between market prices and intrinsic values. But in practice this is not true. J. M. Keynes argued that all sorts of consideration enter into the market valuation which is in no way relevant to the prospective yield. This was confirmed by L.C. Gupta who found that the market evaluation processes work haphazardly almost like a blind man firing a gun. The market seems to function largely on hit or miss tactics, rather than on the basis of informed beliefs about the long Term prospects of individual enterprise.

d. Monopolistic Influence – A market is regarded as highly competitive. No single buyer or seller is supposed to have undue influence over prices but in practice, powerful institutions and big operators wield great influence over the market. The monopolistic power enjoyed by them diminishes the competitiveness of the market.

Part – 2 (Numerical Problems: Topic)

Question 1.
Amal Ltd. has been maintaining a growth rate of 12% in dividends. The company has paid dividend @ Rs. 3 per share. The rate of return on market portfolio is 15% and the risk-free rate of return in the market has been observed as 10%. The beta co-efficient of the company’s share is 1.2.
You are required to calculate the expected rate of return on the company’s shares as per CAPM model and the equilibrium price per share by dividend growth model. [Nov. 2010] [5 Marks]
Answer:
Capital Asset Pricing Model (CAPM) formula for calculation of expected rate of return is
E_R = R_f + β(R_m – R_f)
Where,
E_R = Expected Return
β = Beta of Security
R_m = Market Return
R_f = Risk free Rate
= 10 + [1.2 (15 – 10)]
= 10 + 6 = 16%
As per dividend Price model with constant growth, the equilibrium price:-
Where,
K_e = \(\frac{D_1}{P_0}\) + g
K_e = Expected Return
D₁ = Dividend expected after 1 year

P₀ = \(\frac{D_1}{K e-g}\)
P₀ = Market Price of the share
g = Growth rate
P₀ = \(\frac{3(1.12)}{0.16-0.12}\)
P₀ = \(\frac{3.36}{0.04}\) = Rs, 84
Therefore, equilibrium price per share will be Rs. 84.

Question 2.
A holds the following portfolio:

Calculate:
(i) The expected rate of return on his portfolio using Capital Asset Pricing Method (CAPM) ‘
(ii) The average return of his portfolio.
The Risk-free return is 14%. [May 2008] [10 Marks]
Answer:
(i) Expected rate of return

Expected Return on market portfolio
= \(\frac{\text { Dividend }+ \text { Capital Gains }}{\text { Initial investment }}=\frac{146+145}{1105}\) = 26.33%
Return as per CAPM
ER_p = R_F + β (R_M – R_F)

Gold Ltd.	14+ 0.6 [16.84- 14]	= 14+1.70	= 15.70%
Silver Ltd.	14+ 0.8 [16.84- 14]	= 14 + 2.27	= 16.27%
Bronze Ltd.	14 +0.6 [ 16.84- 14]	= 14+1.70	= 15.70%
GOI Bonds	14+1.0 [16.84- 14]	= 14 + 2.84	= 16.84

(ii) Average Return of Portfolio (Based on simple average.)
\(\frac{23.86+22.63+20.17+14.12}{4}=\frac{80.78}{4}\) = 20.20%
Alternatively, first simple average of the Beta can be calculated and then the CAPM applied:
= \(\frac{0.8+0.7+0.5+0.01}{4}=\frac{2.01}{4}\) = 0.5025
14 + 0.5025 (26.33 – 14)
14 + 6.20 = 20.20%

Question 3.
Mr. Fed Up wants to invest an amount of Rs. 520 lakhs and had approached his Portfolio Manager. The Portfolio Manager had advised Mr. Fed Up to invest in the following manner:

You are required to advise Mr. Fed Up in regard to the following, using Capital Asset Pricing Methodology:
(i) Expected return on the portfolio, if the Government Securities are at 8% and the Nifty is yielding 10%.
(ii) Advisability of replacing Security ‘Better’ with NIFTY. [Nov. 2012] [8 Marks]
Answer:
(i) Expected Return from Portfolio as per CAPM

Thus Expected Return from Portfolio 10.208% =10.21% (Rounded off)

Alternatively, it can be computed by calculating the weighted Beta and applying CAPM as follows:
Average β =
0.50 × \(\frac{60}{520}\) + 1.00 × \(\frac{80}{520}\) + 0.80 × \(\frac{100}{520}\) + 1.20 × \(\frac{120}{520}\) + 1.50 × \(\frac{160}{520}\) = 1.104

As per CAPM
= 8% + 1.104 (10% – 8%)
= 0.10208 i.e. 10.208%

(ii) As computed above the expected return from Better is 10% which is exactly the same as from Nifty, hence there will be no difference even if the replacement of security is made. The reason behind this is that the beta of security ‘Better’ is 1 which is same as that of market, so, it clearly indicates that this security shall yield same return as market return.

Question 4.
Mr. Ram is holding the following securities :

Calculate :
(i) Expected rate of return in each case, using the Capital Asset Pricing Model (CAPM).
(ii) Average rate of return, if risk free rate of return is 14%. [Nov. 2013] [8 Marks]
Answer:
Since, the market return is missing in the question, which is required to calculate the expected return of each security on the basis of CAPM, therefore, assuming the investments to be representing the market, first, average return on this portfolio is calculated.
(i) Expected Rate of Return

Securities	Total Investments	Dividends	Capital Gains
Gold Ltd.	11,000	1,800	1,000(12000 – 11000)
Silver Ltd.	16,000	1,000	1,200(17200 – 16000)
Bronze Ltd.	12,000	800	6,000(18000 – 12000)
GOI Bonds	40,000	4,000	(2,500) (37500 – 40,000)
	79,000	7,600	5,700

Expected rate of return on portfolio
\(\frac{\text { Dividend Earned }+ \text { Capital appreciation }}{\text { Initial investment }}\) × 100
= \(\frac{\text { Rs. } 7600+\text { Rs. } 5,700}{\text { Rs. } 79,000}\) × 100 = 16.84%
Now, taking 16.84% as market return the Rate of Return of each security using CAPM
= Rf + B (Rm – Rf)

Gold Ltd.	14+ 0.6 [16.84- 14]	= 14 + 1.70	= 15.70%
Silver Ltd.	14+ 0.8 [16.84- 14]	= 14 + 2.27	= 16.27%
Bronze Ltd.	14 +0.6 [ 16.84- 14]	= 14 + 1.70	= 15.70%
GOI Bonds	14+1.0 [16.84- 14]	= 14 + 2.84	= 16.84

(ii) Expected Average Return of Portfolio (Based on simple average)
= \(\frac{15.70+16.27+15.70+16.84}{4}=\frac{64.51}{4}\) = 16.127%

Alternatively, It may also be calculated by first finding average Beta and then applying CAPM
Simple Average of Beta = \(\frac{0.6+0.8+0.6+1.0}{4}\)
= 0.75
14% + 0.75 (16.84% – 14%) = 14% + 2.13% = 16.13%

Question 5.
Mr. Shyam is holding the following securities:

Average return of the portfolio is 15.7%, calculate:
(i) Expected rate of return in each, using the Capital Asset Pricing Model (CAPM).
(ii) RisL free rate of return. [May 2015] [8 Marks]
Answer:

Particulars of Securities	Cost Rs.	Dividend	Capital Gain
Gold Ltd.	10,000	1,725	-200(9800- 10,000)
Silver Ltd.	15,000	1,000	1,200 (16200- 15000)
Bronze Ltd.	14,000	700	6,000 (20,000 – 14000)
GOI Bonds	36,000	3,600	-1,500 (34500-36000)
Total	75,000	7,025	5,500

(i) Average rate of return on market portfolio
\(\frac{\text { Dividend Earned }+ \text { Capital appreciation }}{\text { Initial investment }}\) × 100
= \(\frac{R s \cdot 7,025+R s \cdot 5,500}{R s \cdot 75,000}\) × 100 = 16.7%

Rate of Return of each security using CAPM = Rf + B (Rm – Rf)
Note: The risk free rate is required to be calculated for the solution. As this is asked in the second part of the question, the figure of 14.69% has been taken from there.
Gold Ltd. = 14.69 + 0.6 (16.7 – 14.69) = 15.90%
Silver Ltd. = 14.69 + 0.8 (16.7 – 14.69) = 16.30%
Bronze Ltd. = 14.69 + 0.6 (16.7 – 14.69) = 15.90%.
GOL Bonds = 14.69 + 0.01 (16.7 – 14.69) = 14.72%

(ii) Risk free return
Simple Average of Beta = \(\frac{0.6+0.8+0.6+0.01}{4}\)
= 0.5025
Average return = Risk free return + Average Beta (Market return – Risk free return)
15.7 = Risk free return + 0.5025 (16.7 – Risk free return)
Risk free return = 14.69%.

Question 6.
Mr. X holds the following portfolio:

The risk-free rate of return is 12%
Calculate the following:
(i) The expected rate of return on his portfolio using Capital Asset Pricing Model (CAPM).
(ii) The average return on Ms portfolio. (Calculate up to two decimal points) [Nov. 2019] [8 Marks]
Answer:
The market return is missing in the question, which is required to calculate the expected return of portfolio on the basis of CAPM. Therefore, it has been assumed that the portfolio given in the question represents the market.
(i) Calculation of Expected Rate of Return

Expected rate of return on Portfolio
= \(\frac{\text { Dividend Earned }+ \text { Capital appreciation }}{\text { Initial investment }}\) × 100
= \(\frac{\text { Rs. } 11,600+\text { Rs. } 10,000}{\text { Rs. } 1,36,000}\) × 100 = 15.88%

Determination of Average Beta
Simple Average ol Beta = \(\frac{0.9+0.8+0.6+0.4}{4}\)
= 0.675
Alternatively, It may also be calculated by finding weighted average Beta and then applying CAPM

(i) Calculation of Expected Average Return of Portfolio (Using CAPM)
= Rf + B (Rm – Rf)
12% + 0.675 (15.88 – 12%) = 12% + 2.62% = 14.62%

(ii) Average Return of Portfolio :
= \(\frac{\text { Dividend Earned }+ \text { Capital appreciation }}{\text { Initial investment }}\) × 100
= \(\frac{\text { Rs. } 11,600+\text { Rs. } 10,000}{\text { Rs. } 1,36,000}\) × 100 = 15.88%

Question 7.
The following information is available in respect of Security A

Equilibrium Return	12%
Market Return	12%
6% Treasury Bond Trading at	120
Covariance of Market Return and Security Return	196%
Coefficient of Correlation	0.80

You are required to determine the Standard Deviation of Market Return and Security Return. [Nov. 2016] [5 Marks]
Answer:
First we shall compute the β of Security A
Since, 6% treasury bond is trading at Rs. 120, therefore, Risk Free Rate
= \(\frac{\text { Coupon Payment }}{\text { Current Market Price }}=\frac{6}{120}\) = 5%
Assuming equilibrium return to be equal to CAPM return then:
12% = R_f + β_A (R_m – R_f)
12% = 5% + β_A (12% – 5%)

Solving for β_A:
β_A = 1

(i) Standard Deviation of Market Return
β_A = \(\frac{{Cov}_{A, m}}{\sigma_m^2}=\frac{196 \%}{\sigma_m^2}\)
σ_m² = 196%
σ_m = \(\sqrt{196}\) = 14%

(ii) Standard Deviation of Security Return
β_A = \(\frac{\sigma_A}{\sigma_m}\) × ρ_xm = \(\frac{\sigma_x}{14}\) × 0.8 = 1
σ_A = \(\frac{14}{0.80}\) = 17.50%

Question 8.
A company has a choice of investments between several different equity-oriented mutual funds. The company has an amount of ₹ 1 crore to invest. The details of the mutual funds are as follows:

Mutual Fund	Beta
A	1.6
B	1.0
C	0.9
D	2.0
E	0.6

Required:
(i) If the company invests 20% of its investment in the first two mutual funds and an equal amount in the mutual funds C, D and E, what ¡s the beta of the portfolio?
(ii) If the company Invests 15% of its investment in C, 15% in A, 10% In E and the balance In equal amount In the other two mutual funds, what is the beta of the portfolio?
(iii) If the expected return of market portfolio is 12% at a beta factor of 1.0, what will be the portfolios expected return in both the situations given above? [May 2008] [10 Marks]
Answer:
(i) Portfolio Beta is the weighted average of the Betas of various securities. When the investment in each MF is 20%, the weighted average of the Betas of various securities shall be the same as simple average and it is calculated as below:
Simple Average of Beta = \(\frac{1.6+1+0.9+2+0.6}{5}\) = 1.22

(ii) With varied percentage of investments, portfolio beta is calculated as follow:

Investment	Beta (β)	(W) Investment (₹ Lacs)	Weight × Beta
A	1.6	15	24
B	1	30	30
C	0.9	15	13.5
D	2	30	60
E	0.6	10	6
		100	133.5

Weighted BETA = 1.335

(iii) Expected return of the portfolio with pattern of investment as in
case (i) 120/6 × 1.22 i.e. 14.64%
case (ii) 12% × 1.335 i.e., 16.02%

Question 9.
Consider the following information on two stocks, A and B.

Year	Return on A (%)	Return of B(%)
2006	10	12
2007	16	18

You are required to determine:
(i) The expected return on a portfolio containing A and B in the proportion of 40% and 60% respectively.
(ii) The Standard Deviation of return from each of the two stocks.
(iii) The covariance of returns from the two stocks.
(iv) Correlation coefficient between the returns of the two stocks.
(v) The risk of a portfolio containing A and B in the proportion of 40% and 60%. [Nov. 2008] [May 2018] [5 Marks]
Answer:
(i) Expected return of the stock A andB
E (A) = (10 + 16)/2 = 13%
E (B) = (12 + 18)/2 = 15%
R_p = \(\sum_{i=1}^N\)X_iR_i = 0.4 (13) + 0.6 (15) = 14.2%

(ii) Standard deviation of return from each stock.
Stock A:
Variance = \(\frac{\sum_{i=1}^n\left(x_i-\bar{X}\right)^2}{N}\)
Variance = 0.5 (10 – 13)² + 0.5 (16 – 13)² = 9
Standard deviation = √9 = 3%

Stock B:
Variance = 0.5 (12 – 15)² + 0.5 (18 – 15)² = 9
Standard deviation = 3%

(iii) Covariance of stocks A and B
Covariance = \(\frac{\sum_{i=1}^n\left(x_i-\bar{X}\right)\left(\mathbf{Y}_i-\bar{Y}\right)}{\mathbf{N}}\)
Cov_AB = 0.5 (10 – 13) (12 – 15) + 0.5 (16 – 13) (18 – 15) = 9

(iv) Correlation of coefficient
r_AB = \(\frac{C o v_{A B}}{\sigma_A \sigma_\beta}=\frac{9}{3 \times 3}\) = 1

(v) Portfolio Risk
Portfolio Variance
σ²_AB = W_A²σ_A² + W_B²σ_B² + 2W_AW_Bσ_Aσ_Br
σ = \(\sqrt{1.44+3.24+4.32}\) = 3%

Question 10.
Consider the following information on two stocks X and Y:

Year	Return on X (%)	Return on Y (%)
2008	12	10
2009	18	16

You are required to determine :
(i) The expected return on a portfolio containing X and Y in the proportion of 60% and 40% respectively.
(ii) The standard deviation of return from each of the two stocks.
(iii) The covariance of returns from the two stocks.
(iv) Correlation co-efficient between the returns of the two stocks.
(v) The risk of portfolio containing X and Y in the proportion of 60% and 40%. [Nov. 2010] [8 Marks]
Answer:
(i) Computation of Expected return of the stock X and Y:
E(X) = (12 + 18)/2 = 15%
E(Y) = (10 + 16)/2 = 13%
R_p = \(\sum_{i=1}^N\) X_iR_i = 0.6 (15)+ 0.4 (13) = 142%

(ii) Computation of Standard deviation of return from each of the two stock:
Stock X:
Variance = \(\frac{\sum_{i=1}^n\left(x_i-\bar{X}\right)^2}{N}\)
Variance = 0.5 (12 – 15)² + 0.5 (18 – 15)² = 9
Standard deviation = √9 = 3%

Stock Y:
Variance = \(\frac{\sum_{i=1}^n\left(Y_i-\bar{Y}\right)^2}{N}\)
Variance = 0.5 (10 – 13)² + 0.5 (16 – 13)² = 9
Standard deviation = √9 = 3%.

(iii) Computation of Covariance of Stock X and Y
Covariance = \(\frac{\sum_{i=1}^n\left(\mathrm{x}_i-\bar{X}\right)\left(\mathrm{Y}_i-\bar{Y}\right)}{\mathrm{N}}\)
Cov_xy = 0.5 (12 – 15) (10 – 13) + 0.5 (18 – 15) (16 – 13) = 9

(iv) Computation of Correlation of Coefficient
γ_xy = \(\frac{C O V_{x y}}{\sigma_x \sigma_y}=\frac{9}{3 \times 3}\) = 1

(v) Portfolio Risk
σ_p = \(\sqrt{\left((0.6)^2(3)^2+(0.4)^2(3)^2+2(0.6)(0.4)(3)(3)(1)\right)}\)
= \(\sqrt{3.24+1.44+4.32}\)
= √9 = 3%.

Question 11.
Mr. Gupta is considering investment in the shares of R. Ltd. He has the following expectations of return on the stock and the market:

Probability	Return
	R.Ltd.	Market
0.35	30	25
0.30	25	20
0.15	40	30
0.20	20	10

You are required to:
(i) Calculate the expected return, variance and standard deviation for R.Ltd.
(ii) Calculate the expected return, variance and standard deviation for the market.
(iii) Find out the beta Co-efficient for R Ltd. shares. [Nov. 2018 old syllabus][8 Marks]
Answer:
(i) Calculation of expected return, variance and standard deviation of R Ltd.

Expected. Return
= 0.35 (30) + 0.30 (25) + 0.15 (40) + 0.20 (20)
= 10.5 + 7.5 + 6 + 4
= 28%
Variance = ΣP₁(X_i – x̄)²
= 38.5%
σ_R = \(\sqrt{38.5}\) = 6.205%

(i) Calculation of expected return, variance andstandard deviation of Market.

Expected Return market
= 0.35 (25) + 0.30 (20) + 0.15 (30) + 0.20 (10)
= 8.75 + 6 + 4.5 + 2
= 21.25%

Variance = ΣP₁(X_i – x̄)²
= 42.1875%
σ_M = \(\sqrt{42.1875}\) = 6.4952%

(ii) The Beta coefficient of R Ltd. shares:

Beta = \(\frac{\text { Covariance }}{\sigma_M{ }^2}\)
\(\frac{37.50}{6.4952^2}\) = 0.888

Question 12.
An investor is holding 5,000 shares of X Ltd. Current year dividend rate is Rs. 3/share. Market price of the share is Rs. 40 each. The investor is concerned about several factors which are likely to change during the next financial year as indicated below:

	Current Year	Next Year
Dividend paid/anticipated per share (Rs.)	3	2.5
Risk free rate	12%	10%
Market Risk Premium	5%	4%
Beta Value	1.3	1.4
Expected growth	9%	7%

In view of the above, advise whether the investor should buy, hold or sell the shares, [Nov. 2014] [6 Marks]
Answer:
The Investor should take the decision to buy, hold or sell the shares on the basis of change in price and rate of return.
Existing rate of return
= R_f + Beta (R_m – R_f)
= 1296 + 1.3 (596) = 18.5%

Revised rate of return
= 10% + 1.4 (4%) = 15.60%

Price of share (original)
P₀ = \(\frac{D(1+g)}{K_e-g}=\frac{3(1.09)}{0.185-0.09}=\frac{3.27}{0.095}\) = Rs. 34.42
Price of share (Revised)
P₀ = \(\frac{2.50(1.07)}{0.156-0.07}=\frac{2.675}{0.086}\) = Rs. 31.10
The current market price of share is Rs. 40. It is higher in comparison to current equilibrium price of Rs. 34.42 and revised equity price of Rs. 31.10. Under this situation investor should sell the share.

Question 13.
The following information are available with respect of Krishna Ltd.

Compute Beta Value of the Krishna Ltd. at the end of 2015 and state your observation. [May 2017] [8 Marks]
Answer:

Returns from Market Index

Average Return of Krishna Ltd. = \(\frac{60.79}{3}\) = 20.26%
Average Market Return = \(\frac{43.92}{3}\) = 14.64%

As the Beta of the stock is 1.92 which is relatively high, therefore, the stock is a risky investment

Question 14.
Following is the data regarding six securities:

(i) Which of three securities will be selected?
(ii) Assuming perfect correlation, analyse whether it is preferable to invest 80% in security U and 20% in security W or to invest 100% in Y. [Nov. 2009] [6 Marks]
Answer:
(i) When we make risk-return analysis of different securities from U to Z, we can observe that security U gives a return of 10% at risk level of 5%. Simultaneously securities V and Z give the same return of 10% as of security U, but their risk levels are 6% and 7% respectively. Security X is giving only 5% return for the risk rate of 5%. Hence, security U dominates securities V, X and Z.
Securities W and Y offer more return but it carries higher level of risk. Hence securities U, W and Y can be selected based on individual preferences.

(ii) In a situation where the perfect positive correlation exists between two securities, their risk and return can be averaged with the proportion.
Assuming the perfect correlation exists between the securities U and W, average risk and return of U and W together for proportion 4 : 1 is calculated as follows:
Risk = (4 × 5% + 1 × 13%) ÷ 5 = 6.6%
Return = (4 × 10% + 1 × 15%) ÷ 5 = 11%

Therefore:	80% U	100%Y
	20% V	–
Risk	6.6%	6%
Return	11%	11%

Where we compare risk of 6.6% and return of 11% with security Y with 6% risk and 11% return, security Y is preferable over the portfolio of securities U and W in proportion of 4:1.

Question 15.
The returns on stock A and market portfolio for a period of 6 years are as follows:

Year	Return on A (%)	Return on market portfolio (%)
1	12	8
2	15	12
3	11	11
4	2	-4
5 ‘	10	9.5
6	-12	-2

You are required to determine:
(i) Characteristic line for stock A
(ii) The systematic and unsystematic risk of stock A. [May 2009] [8 Marks]
Answer:
Characteristic line is given by
Y = α + βRm
βi = \(\frac{\sum x y-n \bar{x} \bar{y}}{\sum x^2-n(\bar{x})^2}\)
αi = ȳ – βx̄


α = ȳ – βx̄ = 6.33 – 1.202(5.75) = -0.58
Hence the characteristic line is -0.58 + 1.202 (R_m)
Market variance = σ_m² = \(\frac{\sum(x-\bar{x})^2}{n}=\frac{240.86}{6}\) = 240,86 =3 40.14(%)
Total Risk of Stock = σ_s² = \(\frac{\sum(y-\bar{y})^2}{n}=\frac{497.34}{6}\) = 82.89(%)
Systematic Risk of the stock = βi2σ_m² = (1.202)² × 40.14 = 57.99(9-6)
Therefore, Unsystematic Risk = Total Risk – Systematic Risk
= 82.89 – 57.99 = 24.90(%)

Question 16.
The returns and market portfolio for a period of four years are as under:

Year	% Return of Stock B	% Return on Market Portfolio
1	10	8
2	12	10
3	9	9
4	3	-1

For stock B, you are required to determine:
(i) characteristic line; and
(ii) the Systematic and Unsystematic risk.
Answer:

β = 0.740
(i) Characteristic line of stock B
Y = a + bX
a = ȳ – bx̄
= 8.5 – (0.74 × 6.5)
= 3.69
Characteristic line y = 3.69 4 0.74 R_m

(ii) The Systematic and Unsystematic Risk

	Variance approach
Total Risk of stock B	11.25%
Systematic Risk	β2 × σm2 = (0.74)2 σ 19.25 = 10.54
Unsystematic Risk	Total risk-systematic risk = 0.71%
	(11.25%- 10.54%)

Question 17.
X Co. Ltd. invested on 1.4.2009 in certain equity shares as below:

Name of Co.	No. of shares	Cost (Rs.)
M Ltd.	1,000 (Rs. 100 each)	2,00,000
N Ltd.	500 (Rs. 10 each)	1,50,000

In September 2009,10% dividend was paid out by M Ltd. and in October 2009, 30% dividend paid out by N Ltd. on 31.3.2010 market quotations showed a value of Rs. 220 and Rs. 290 per share for M Ltd. and N Ltd. respectively. On 1.4.2010, investment advisors indicate (a) that the dividends from M Ltd. and N Ltd. for the year ending 31.3.2011 are likely to be 20% and 35%, respectively and (b) that the probabilities of market quotations on 31.3.2011 are as below:

Probability Factor	Price/share of M Ltd.	Price/share of N Ltd.
0.2	220	290
0.5	250	310
0.3	280	330

You are required to:
(i) Calculate the average return from the portfolio for the year ended 31.3.2010;
(ii) Calculate the expected average return from the portfolio for the year 2010-11; and
(iii) Advise X Co. Ltd., of the comparative risk in the two investments by calculating the standard deviation in each case. [May 2008] [8 Marks]
Answer:
(i) Average rate of return of the portfolio

(iii) Calculation of Standard Deviation

Standard Deviation (σ_M) 14
Share of company M Ltd. is more risky as the S.D. is more than company N Ltd.

Question 18.
An investor holds two stocks A and B. An analyst prepared ex-ante probability distribution for the possible economic scenarios and the conditional returns for two stocks and the market index as shown below:

The risk free rate during the next year is expected to be around 11%. Determine whether the investor should liquidate his holdings in stocks A and B or on the contrary make fresh investments in them. CAPM assumptions are holding true. [Nov. 2009] [10 Marks]
Answer:
Expected Return on stock A = E (A) = V P.A.
(0.40) (25) + 0.30(10) + 0.30 (-5) = 11.5%

Expected Return on ‘B’
(0.40 × 20) + (0.30 × 15) + 0.30 × (-8) = 10.1%

Expected Return on Market index
(0.40 × 18) + (0.30 × 13) + 0.30 × (-3) = 10.2%

Variance of Market index
(18 – 10.2)² (0.40) + (13 – 10.2)² (0.30) + (-3 – 10.2)² (0.30)
= 24.34 + 2.35 + 52.27 = 78.96%

Covariance of stock A and Market Index M
Cov. (AM) = Σ [A_i – E(A)] [M_i – E(M)]P
(25-11.5) (18-10.2) (0.40) + (10 – 11.5) (13-10.2) (0.30) + (-5-11.5) (-3-10.2) (0.30)
= 42.12 + (-1.26) + 65.34 = 106.20

Covariance of stock B and Market index M
(20 – 10.1) (18 – 10.2) (0.40) + (15 – 10.1) (13 – 10.2) (0.30) + (-8 – 10.1) (-3-10.2) (0.30)
= 30.89 + 4.12 + 7167
= 106.68
Beta for stock A = \(\frac{{CoV}(A M)}{V A R(M)}=\frac{106.20}{78.96}\) = 1.345
Beta for Stock B = \(\frac{{CoV}(B M)}{Var(M)}=\frac{106.20}{78.96}\) = 1.351
Required Return for A
R (A) = R_f + p (M – R_f)
11% + 1.345 (10.2 – 11)% = 9.924%
Required Return forB
11% + 1.351 (10.2 – 11)% = 9,92%

Alpha for Stock A
E (A) – R (A) ie. 11.5% – 9.924% = 1.576%

Alpha for Stock B
E (B) – R (B) ie. 10.1% – 9,92% = 0.18%
Since stock A and B both have positive Alpha, therefore, they are UNDERPRICED. The investor should make fresh investment in them.

Question 19.
An investor has two portfolios known to be on minimum variance set for a population of three securities A, B and C having below-mentioned weights:

It is supposed that there are no restrictions on short sales.
(i) What would be the weight for each stock for a portfolio constructed by investing Rs. 5,000 in portfolio X and Rs. 3,000 in portfolio Y?
(ii) Suppose the investor invests Rs. 4,000 out of Rs. 8,000 in security A. How he will allocate the balance between security B and C to ensure that his portfolio is on minimum variance set? [May 2009] [6 Marks]
Answer:
(i) Investment committed to each security would be:

(ii) The equation of critical line takes the following from:-
WB = a + bWA
Substituting the values of WA & WB from portfolio X and Y in above equation, we get
0.40 = a + 0.30b,
and 0.50 = a + 0.20b
Solving above equation we obtain the slope and intercept, a = 0.70 and b = -1 and thus, the critical line is
WB = 0.70 – WA
If half of the funds is invested in security A then,
WB = 0.70 – 0.50 = 0.20
Since WA + WB + WC = 1
WC = 1 – 0.50 – 0.20 = 0.30
∴ Allocation of funds to security B = 0.20 × 8,000 = Rs. 1,600, and
Security C = 0.30 × 8,000 = Rs. 2,400

Question 20.
A study by a Mutual fund has revealed the following data in respect of three securities:

Security	σ (%)	Correlation with Index, Pm
A	20	0.60
B	18	0.95
C	12	0.75

The standard deviation of market portfolio (BSE Sensex) is observed to be 15%
(i) What is the sensitivity of returns of each stock with respect to the market?
(ii) What are the covariances among the various stocks?
(iii) What would be the risk of portfolio consisting of all the three stocks equally?
(iv) What is the beta of the portfolio consisting of equal investment in each stock?
(v) What is the total, systematic and unsystematic risk of the portfolio in (iv)? [Nov. 2009] [8 Marks]
Answer:
(i) Sensitivity of each stock with market is given by its beta.
Standard deviation of market Index =15%
Variance of market Index = 0.0225
Beta of stocks = rσ_i/ σ_m
A = 0.60 × 20/15 = 0.80
B = 0.95 × 18/15 = 1.14
C = 0.75 × 12/15 = 0.60

(ii) Covariance between any 2 stocks = β₁β₂σ²m
Covariance matrix

Stock/Beta	0.80	1.14	0.60
A	400.00	205.200	108.000
B	205.200	324.000	153.900
C	108.000	153.900	144.000

(iii) Total risk of the equally weighted portfolio (Variance)
= 400(1 /3)² + 324(1 /3)² + 144(1 /3)² + 2 (205.20) (1/3)² + 2 (108.0) (1/3)² + 2(153.900) (1/3)²
= 200.244

(iv) β of equally weighted portfolio = βp = Σβ/N = \(\frac{0.80+1.14+0.60}{3}\)
= 0.8467

(v) Systematic Risk β2am2 = (0.8467)² (15)² = 161.302
Unsystematic Risk = Total Risk – Systematic Risk
= 200.244- 161.302 = 38.942

Question 21.
Following are risk and return estimates for two stocks :

Stock	Expected returns (%)	Beta	Specific SD of expected return (%)
A	14	0.8	35
B	18	1.2	45

The market index has a Standard Deviation (SD) of 25% and risk free rate on Treasury Bills is 6%.
You are required to calculate :
(i) The standard deviation of expected returns on A and B.
(ii) Suppose a portfolio is to be constructed with the proportions of 25%, 40% and 35% in stock A, B and Treasury Bills respectively, what would be the expected return, standard deviation of expected return of the portfolio ? [Nov. 2019] [8 Marks]
Answer:
(i) The standard deviation of expected returns on A and B is 35% and 45% as already given in the question.
(ii) Expected return and risk of portfolio with investment in A 25%, in B 40% and treasury bills 35%.
Return = W₁R_A + W₂R_B + W₃R_Tr.Bills
Risk = 0.25 (14) + 0.40 (18) + 0.35 (6) = 12.8%
Risk = \(\sqrt{\sigma_1{ }^2 \mathrm{~W}_1{ }^2+\sigma_2{ }^2 \mathrm{~W}_2{ }^2+\sigma_3{ }^2+\mathrm{W}_3{ }^2+2 \mathrm{w}_1 \mathrm{w}_2 {Cov}_{12}+2 \mathrm{w}_1 \mathrm{w}_3 {Cov}_{13}+2 \mathrm{w}_2 \mathrm{w}_3 {Cov}_{23}}\)
Calculation of Covariance between A and B = Beta (A) × Beta (B) × Market
variance Covariance between any 2 stocks = β₁β₂σ²m
= 0.8 × 1.2 × 25² = 600
As σ₃ =0 Being treasury bills and r₂₃ and r₁₃ is also 0, the formula reduces to:

Question 22.
Mr. Tempest has the following portfolio of four shares:

Name	Beta	Investment Rs. Lac
Oxy Rin Ltd.	0.45	0.80
Boxed Ltd.	0.35	1.50
Square Ltd.	1.15	2.25
Ellipse Ltd.	1.85	4.50

The risk free rate of return is 7% and the market rate of return is 14% [May 2011] [5 Marks]
Required:
(i) Determine the portfolio return,
(ii) Calculate the portfolio Beta.
Answer:

Therefore the Portfolio return is 16.13%
Alternatively, the return may also be calculated after calculating the weighted Beta and using it in CAPM. WeightedBeta= 1.3035 as calculated in Part (ii) of the question.
(i) Portfolio Return using CAPM formula will be as follows:
E = R_f + Beta (R – R_f)
= 7% + 1.3035 (14% – 7%) = 7% + 1.3035(7%)
= 7% + 9.1245% = 16.1245%

(ii) Portfolio Beta
0.45(0.884) + 0.35(0.1657) + 1.15(0.2486) 4- 1.85 (0.4972)
= 1.3035

Question 23.
A has portfolio having following features:

You are required to find out the risk of the portfolio if the Standard deviation of the market index (σ_m) is 18%. [May 2012] [8 Marks]
Answer:
The variance of portfolio Return = Systematic Variance + Unsystematic Variance.

Systematic Variance = (1.295)2 x (18)2= 543.36, Weighted unsystematic
variance =17.755
Therefore, Standard deviation of the portfolio (cr2) = 543.36 + 17.75 =561.11%

Question 24.
Following are the details of a portfolio consisting of 3 shares:

Standard Deviation of Market Portfolio Returns = 12%
You are required to calculate the following:
(i) The Portfolio Beta.
(ii) Residual variance of each of the three shares.
(iii) Portfolio variance using Sharpe Index Model. [May 2019] [8 Marks]
Answer:
(i) Portfolio Beta
0.30 × 0.5 + 0.50 × 0.60 + 0.20 × 1.20 = 0.69

(ii) Residual Variance
To determine Residual Variance first of all we shall compute the Systematic Risk as follows:
β_x² × σ_N² = (0.50)² (0.12)² = 0.0036
β_y² × σ_N² = (0.60)² (0.12)² = 0.005184 = 0.0052 approx.
β_z² × σ_N² = (1.20)² (0.12)² = 0.020736 = 0.0207 approx

Residual Variance (Total risk – Systematic risk)
X Ltd. = 0.020 – 0.0036 = 0.0164
Y Ltd. = 0.010 – 0.0052 = 0.0048
Z Ltd. = 0.120 – 0.0207= 0.0993

(iii) Portfolio variance using Sharpe Index Model /
= Systematic risk + Unsystematic risk
Systematic Variance of Portfolio = β_p² × σ_N² (0.69)² × (0.12)² = 0.006856
Unsystematic Variance of Portfolio is the weighted average of the residual risk of individual securities.
Unsystematic Variance of Portfolio = (0.0164) × (0.30)² + (0.0048) × (0.50)² + (0.0993) × (0.20)²
= 0.001476 + 0.0012 + 0.003972 = 0.006648
Total Variance = 0.006856 + 0.006648 = 0.013 504 = 135.04%

Question 25.
Following are the details of a portfolio consisting of three shares:

Standard Deviation of Market Portfolio Returns = 10%
You are given the following additional data:
Covariance (A, B) = 0.030
Covariance (A, C) = 0.020
Covariance (B, C) = 0.040
Calculate the following:
(i) The Portfolio Beta
(ii) Residual variance of each of the three shares
(iii) Portfolio variance using Sharpe Index Model
(iv) Portfolio variance (on the basis of modern portfolio theory given by Markowitz) [May 2015] [8 Marks]
Answer:
(i) Portfolio Beta [It is the weighted average of Beta]
0.20 × 0.40 + 0.50 × 0.50 + 0.30 × 1.10 = 0.66

(ii) Residual Variance or unsystematic risk
To determine Residual Variance first of all we shall compute the Systematic Risk as follows:
β_A² × σ_N² =(0.40)² (0.1)² = 0.0016
β_B² × σ_N² =(0.50)² (0.1)² = 0.0025
β_C² × σ_N² = (1.10)² (0.1)² = 0.0121
Residual Variance (Total risk – Systematic risk)
A 0.015-0.0016 = 0.0134
B 0.025 – 0.0025 = 0.0225
C 0.100-0.0121 =0.0879

(iii) Portfolio variance using Sharpe Index Model
Systematic Variance of Portfolio = β_p² × σ_N² (0.66)² × (0.10)² = 0.004356
The unsystematic variance of the portfolio is the weighted average of individual residual variance of securities in the portfolio.
Unsystematic Variance of Portfolio = (0.0134) × (0.20)² + 0.0225 × (0.50)² + 0.0879 × (0.30)² = 0.014072
Total Variance = 0.004356 + 0.014072 = 0.018428

(iv) Portfolio variance on the basis of Markowitz Theory
= (W_A × W_A × σ_A²) (W_A × W_B × COV_AB) + (W_A × W_C × Cov_AC) + (W_B × W_A × Cov_AB) + (W_B × W_B × σ²_B) + (W_B × W_C × Cov_BC) + (W_C × W_A × Cov_CA) + (W_C × W_B × Cov_CB) + (W_C × W_C × σ²_B)
= (0.20 × 0.20 × 0.015) + (0.20 × 0.50 × 0.030) + (0.20 × 0.30 × 0.020) + (0.20 × 0.50 × 0.030) + (0.50 × 0.50 × 0.025) + (0.50 × 0.30 × 0.040) + (0.30 × 0.20 × 0.020) + (0.30 × 0.50 × 0.040) + (0.30 × 0.30 × 0.10)
= 0.0006 + 0.0030 + 0.0012 + 0.0030 + 0.00625 + 0.0060 + 0.0012 + 0.0060 + 0.0090
= 0.0363

Question 26.
A Portfolio Manager (PM) has the following four stocks in his portfolio:

Compute the following: Portfolio beta. [Nov. 2011][8 Marks]
Answer.

Question 27.
Mr. X owns a portfolio with the following characteristics:

	Security A	Security B	Risk Free security
Factor 1 sensitivity	0.80	1.50	0
Factor 2 sensitivity	0.60	1.20	0
Expected Return	15%	20%	10%

It is assumed that security returns are generated by a two-factor model.
(i) If Mr. X has Rs. 1,00,000 to invest and short sells Rs.50,000 of security B and purchases Rs. 1,50,000 of security A what is the sensitivity of Mr. X‘s portfolio to the two factors?
(ii) If Mr. X borrows Rs. 1,00,000 at the risk free rate and invests the amount he borrows along with the original amount of Rs. 1,00,000 in security A and B in the same proportion as described in part (i), what is the sensitivity of the portfolio to the two factors?
(iii) What is the expected return premium of factor 2? [May 2009] [8 Marks]
Answer:
(i) Mr. X’s position in the two securities are + 1.50 in security A and -0.5 in security B.
Hence the portfolio sensitivities to the two factors:-
Factor 1 – 1.50 × 0.80 + (-0.50 × 1.50) = 0.45
Factor 2 = 1.50 × 0.60 + (0.50 × 1.20) = 0.30

(ii) Mr. X’s current position:-
Security A Rs. 3,00,000/Rs. 1,00,000 – 3
Security B -Rs. 1,00,000/Rs. 1,00,000 = -1
Risk free asset – Rs.100000/Rs.100000 = -1
Factor 1 = 3.0 × 0.80 + (-1 × 1.50) + (-1 × 0) = 0.90
Factor 2 = 3.0 × 0.60 + (-1 × 1.20) + (-1 × 0) = 0.60

(iii) Expected Return = Risk Free Rate of Return + Risk Premium
Let λ₁ and λ₂ are the Value of risk premium of Factor 1 and Factor 2 respectively. Since, the return of security A is 15% with sensitivity of 0.8 and 0.6 to Factor 1 and Factor 2 and the return of security B is 20°n with sensitivity of 1.5 and 1.2 to Factor 1 and Factor 2, therefore,
15 = 10+ 0.80 λ₁ + 0.60 λ₂
20= 10+ 1.50 λ₁ +1.20 λ₂
On solving the two equations simultaneously, the value of λ₁ = 0, and the ’premium of securities A & B shall be totally because of λ₁ and which is as follows:
Security A Risk premium
Total Return = 15%
Risk Free Return = 10%
Risk Premium = 5%

Security B Risk premium
Total Return = 20%
Risk Free Return = 10%
Risk Premium = 10%
5 = 0.60 λ₁
10 = 1.20 λ₂
Therefore, Risk premium of factor 2 = λ₂ = 5/0.6 = 8.33

Question 28.
Mr. Kapoor owns a portfolio with the following characteristics:

	Security X	Security Y	Risk free Security
Factor 1 sensitivity	0.75	1.50	0
Factor 2 sensitivity	0.60	1.10	0
Expected Return	15%	20%	10%

It is assumed that security returns are generated by a two factor model.
(i) If Mr. Kapoor has ₹ 1,00,000 to invest and sells short ₹ 50,000 of security Y and purchases ₹ 1,50,000 of security X, what is the sensitivity of Mr. Kapoor’s portfolio to the two factors?
(ii) If Mr. Kapoor borrows Rs. 1,00,000 at the risk free rate and invests the amount he borrows along w ith the original amount of ₹ 1,00,000 in security X and Y in the same proportion as described in part (i), what is the sensitivity of the portfolio to the two factors?
(iii) What is the expected return premium of factor 2? [Nov. 2018][8 Marks]
Answer:
(i) Mr. Kapoor’s position in the two securities are + 1.50 in security A and -0.5 in security B. Hence, the portfolio sensitivities to the two factors are:-
Factor 1 = 1.50 × 0.75 + (-0.50 × 1.50) = 0.375
Factor 2 = 1.50 × 0.60 + (-0.50 × 1.10) = 0.350

(ii) Mr. Kapoor’s changed position:-
Security A = ₹ 3,00,000/₹ 1,00,000 × 3
Security B = ₹ 1,00,000/₹ 1,00,000 = -1
Risk free asset – ₹ 100000/₹ 100000 = -1
Factor 1 = 3.0 × 0.75 + (-1 × 1.50) + (-1 × 0) = 0.75
Factor 2 = 3.0 × 0.60 + (-1 × 1.10) + (-1 × 0) = 0.70

(iii) Expected Return = Risk Free Rate of Return + Risk Premium
Let λ₁ and λ₂ are the Value of risk premium of Factor 1 and Factor 2 respectively. Since, the return of security A is 15% with sensitivity of 0.75 and 0.6 to factor 1 and factor 2 and the return of security B is 20% with sensitivity of 1.5 and 1.1 to facto)’ 1 and factor 2, therefore,
15 = 10 + 0.75λ₁ + 0.60 λ₂
20 = 10 + 1.50 λ₁ + 1.10 λ₂
On solving the two equations simultaneously, the value of λ₂ = 0, and the – premium of securities A & B shall be totally because of λ₁ and which is as follows:

Security A Risk premium	Security B Risk premium
Total Return = 15%	Total Return = 20%
Risk Free Return =10%	Risk Free Return = 10%
Risk Premium = 5%	Risk Premium = 10%

5 = 0.75 λ₁
10= 1.50 λ₁
Therefore, Risk premium of factor 1 = λ₁ = 5/0.75 = 6.66% and the expected risk premium of factor 2 is 0.

Question 29.
Mr. Tamarind intends to invest in equity shares of a company the value of which depends upon various parameters as mentioned below:

Factor	Beta	Expected value in %	Actual value in %
GNP	1.20	7.70	7.70
Inflation	1.75	5.50	7.00
Interest rate	1.30	7.75	9.00
Stock market index	1.70	10.00	12.00
Industrial production	1.00	7.00	7,50

If the risk free rate of interest be 9.25% how much is the return of the share under Arbitrage Pricing Theory? [May 2011] [5 Marks]
Answer:

Question 30.
Indira has a fund of ₹ 3 lacs which she wants to invest in share market with re-balancing target after every 10 days to start with for a period of one month from now. The present NIFTY is 5326. The minimum NIFTY within a month can at most be 4793.4. She wants to know as to how she should re-balance her portfolio under the following situations, according to the theory of Constant Proportion Portfolio Insurance Policy, using “2” as the multiplier:
1. Immediately to start with.
2. 10 days later-being the 1st day of re-balancing if NIFTY falls to 5122.96.
3. 10 days further from the above date if the NIFTY touches 5539.04.
For the sake of simplicity, assume that the value of her equity component will change in tandem with that of the NIFTY and the risk free securities in which she is going to invest will have no Beta. [May 2012] [8 Marks]
Answer:
Maximum decline in one month = \(=\frac{5,326-4793.40}{5,326}\) × 100 = 10%
(1) Immediately to start with
Investment in equity = Multiplier × (Portfolio value – Floor value)
= 2 (3,00,000 – 2,70,000) = ₹ 60,000
Indira may invest ₹ 60,000 in equity and balance in risk free securities.

(2) After 10 days
Value of equity = 60,000 × 51.22.96/5326 = ₹ 57,713
Value of risk free investment = ₹ 2,40,000
Total value of portfolio = ₹ 2,97,713
Investment in equity = Multiplier × (Portfolio value – Floor value)
= 2 (2,97,713 – 2,70,000) = ₹ 55,426

Revised Portfolio:
Equity = ₹ 55,426
Risk Free Securities = ₹ 2,97,713 – ₹ 55,426 = ₹ 2,42,287
Ms. Indira should reduce her investments in equity from ₹ 57,713 to ₹ 55,426 by selling equity worth ₹ 2,287 and investing in risk free securities.

(3) After another 10 days
Valueofequity = 55,426 × 5539.04/5122.96 = ₹ 59,928
Value of risk free investment = ₹ 2,42,287
Total value of portfolio = ₹ 3,02,215
Investment in equity = Multiplier * (Portfolio value – Floor value)
= 2 (3,02,215 – 2,70,000) = ₹ 64,430

Revised Portfolio:
Equity = ₹ 64,430
Risk Free Securities = 3,02,215 – ₹ 64,430 = ₹ 2,37,785
The investor should off-load ₹ 4,502 of risk free securities and divert to Equity.

Question 31.
Ms. Sunidhi is working with an MNC at Mumbai. She is well versant with the portfolio management techniques and wants to test one of the techniques on an equity fund she has constructed and compare the gains and losses from the technique with those from a passive buy and hold strategy. The fund consists of equities only and the ending NAV’s of the fund she constructed for the last 10 months are given below:

Month	Ending NAV (₹/unit)
December 2008	40.00
January, 2009	25.00
February, 2009	36.00
March, 2009	32.00
April, 2009	38.00
May, 2009	37.00
June, 2009	42.00
July, 2009	43.00
August, 2009	50.00
September, 2009	52.00

Assume Sunidhi had invested a notional amount of ? 2 lakhs equally in the equity fund and a conservative portfolio (of Bonds) in the beginning of De-cember 2008 and the total portfolio was being rebalanced each time the NAV of the fund increased or decreased by 15%.
You are required to determine the value of the portfolio for each level of NAV following the Constant Ratio Plan. [Practice Question]
Answer:

Question 32.
Details about portfolio of shares of an investor is as below:

Shares	No. of shares (lakh)	Price per share	Beta
A Ltd.	3.00	₹ 500	1.40
B Ltd.	4.00	₹ 750	1.20
C Ltd.	2.00	₹ 250	1.60

The investor thinks that the risk of portfolio is very high and wants to reduce the portfolio beta to 0.91. He is considering two below’ mentioned alternative strategies:
(i) Dispose off a part of his existing portfolio to acquire risk free securities, or
(ii) Take appropriate position on Nifty Futures which are currently traded at ₹ 8,125 and each Nifty points is worth ₹ 200.
You are required to determine:
(1) portfolio beta,
(2) the value of risk free securities to be acquired,
(3) the number of shares of each company to be disposed off,
(4) the number of Nifty contracts to be bought/sold; and
(5) the value of portfolio beta for 2% rise in Nifty. [Nov. 2016] [8 Marks]
Answer:
Alternative 1 to dispose part of his existing Portfolio.
(1) Portfolio Beta :

Portfolio Beta = \(\frac{6,500}{5,000}\) = 1.3

(2) Let amount of risk free security to be purchase for β = 0.91 be x

Investment	Beta	Weights	Product
Risk free	0	w	0
Portfolio	1.3	1-w	1.3- 1.3 w
Total		1	1.3 – 1.3w

Portfolio Beta = 0.91 = \(\frac{1.3-1.3 w}{1}\)
w = 0.3 or 30%
Amount to be invested in risk-free securities 30% of 5,000 lakhs = 1,500 lakhs.

(3) No. of shares to be sold

Alternative – (ii) to use Nifty futures

(4) No. of Nifty Futures to be traded
No. of contracts = Portfolio value × \(\frac{\text { Desired } \beta \text { of Portfolio }}{\text { Value of future contract }}\)
= 5,000 lakhs × \(\frac{1.30-0.91}{8,125 \times 200}\) = 120 contracts
In order to bring down the Beta of the portfolio from 1.3 to 0.91, opposite position should be taken in Nifty futures. Therefore, 120 contracts of Nifty futures should be sold.

(5) New portfolio Beta after 2% Rise in Nifty

β = \(\frac{6670.8}{5130}\) = 1.30035 = appr. 1.3.
The Beta has increased very slightly as the proportions have not changed significantly.

Question 33.
Ms. Preeti, a school teacher, after retirement has built up a portfolio of ₹ 1,20,000 which is as follows:

Shares	No. of shares	Price per share	Beta
ABC Ltd.	1000	₹ 50	0.9
DEF Ltd.	500	₹ 20	1.0
GHI Ltd.	800	₹ 25	1.5
JKL Ltd.	200	? ₹ 200	1.2

Her portfolio consultant Sri Vijay has advised her to bring down the beta to 0.8. You are required to compute:
(i) Present portfolio beta
(if) How much risk free investments should be brought in, to reduce the beta to 0.8. [May 2019] [8 Marks]
Answer:
(a) Portfolio Beta :

Portfolio Beta = \(\frac{1,33,000}{1,20,000}\) = 1.1083

(ii) Risk free security to be purchase for β = 0.80

Investment	Beta	Weight	Product
Risk free	0	w	0
Portfolio	1.1083	1 – w	1.1083 – 1.1083w
Total			1.1083 – 1.1083w

Portfolio Beta = 0.80 = \(\frac{1.1083-1.1083 w}{1}\)
w = 0.2782 or 27.80% approx.
Amount to he invested in risk free securities
27.80% of ₹ 1,20,000 = ₹ 33,360.

It is assumed that no further inflow of money will occur and the amount should be arranged by selling the existing securities in the same proportion.
No. of shares to be sold

Alternate Solution to Part (ii) :
Required Beta 0.8
It should become (0.8/1.08) 72.2% of present portfolio
If Rs. 1,20,000 is 72.20%, the total portfolio should be Rs. 1,20,000 × 100/72.20 or Rs. 1,66,205
Additional investment in zero risk should be (Rs. 1,66,205 – Rs. 1,20,000) = Rs. 46,205

Revised Portfolio will he

Question 34.
(a) Mr. Abhishek is interested in investing ? 2,00,000 for which he is considering following three alternatives:
(i) Invest ₹ 2,00,000 in Mutual Fund X (MFX)
(ii) Invest ₹ 2,00,000 in Mutual Fund Y (MFY)
(iii) Invest ₹ 1,20,000 in Mutual Fund X (MFX) and ₹ 80,000 in Mutual Fund Y (MFY)
Average annual return earned by MFX and MFY is 15% and 14% respectively. Risk free rate of return is 10% and market rate of return is 12%.
Covariance of returns of MFX, MFY and market portfolio Mix are as follow:

	A MFX	MFY	MIX
MFX	4.800	4.300	3.370
MFY	4.300	4.250	2.800
M	3.370	2.800	3.100

You are required to calculate:
(i) variance of return from MFX, MFY and market return,
(ii) portfolio return, beta, portfolio variance and portfolio standard deviation,
(in) expected return, systematic risk and unsystematic risk; and
(iv) Sharpe ratio, Treynor ratio and Alpha of MFX, MFY and Portfolio Mix. [May 2016] [Nov. 2016] [8 Marks]
Answer:
(i) Variance of Returns
Cori_i,j = \(\frac{{Cov}(i, j)}{\sigma_i \sigma_j}\)

Accordingly, for MFX
1 = \(\frac{{Cov}(X, X)}{\sigma_x \sigma_x}\)
σ_x² = 4.800

Accordingly, for MFY
j = \(\frac{{Cov}(Y, Y)}{\sigma_y \sigma_y}\)
σ_y² = 4.250

Accordingly, for Market Return
1 = \(\frac{{Cov}(M, M)}{\sigma_M \sigma_M}\)
σ_M² = 3.100

(ii) Portfolio return beta, variance and standard deviation
Weight of MFX in portfolio = \(\frac{1,20,000}{2,00,000}\) = 0.60
Weight of MFY in portfolio = \(\frac{80,000}{2,00,000}\) = 0.40

Accordingly Portfolio Return
0.60 × 1596 + 0.40 × 1496 = 14.60%

Beta of each Fund

Portfolio Beta
0.60 × 1.087 + 0.40 × 0.903 = 1.013

Portfolio Variance using Markowitz Model
σ_xy² = W_x²σ_x² + W_y²σ_y² + 2 W_xW_yCov_x,y
= (0.60)² (4.800) + (0.40)² (4.250) + 2(0.60) (0.40) (4.300)
= 4.472
Or Portfolio Standard Deviation
σ_xy = \(\sqrt{4.472}\) = 2.115

(iii) Expected Return, Systematic and Unsystematic Risk of Portfolio
Portfolio Return = 10% + 1.0134 (12% – 10%) = 12.03%
MF X Return = 10% + 1.087 (12% – 10%) = 12.17%
MF Y Return = 10% + 0.903 (12% – 10%) = 11.81%
Systematic Risk = β²σ²
Accordingly,
Systematic Risk of MFX = (1.087)² × 3.10 = 3.663
Systematic Risk of MFY = (0.903)² × 3.10 = 2.528
Systematic Risk of Portfolio = (1.013)² × 3.10= 3.181
Unsystematic Risk = Total Risk – Systematic Risk Accordingly,
Unsystematic Risk of MFX = 4.80 – 3.663 = 1.137
Unsystematic Risk of MFY = 4.250 – 2.528 = 1.722
Unsystematic Risk of Portfolio = 4.472 – 3.181 = 1.291

(iv) Sharpe and Treynor Ratios and Alpha

Alpha Actual Return – Expected
MFX = 15% – 12.17% = 2.83%
MFY = 14% – 11.81% = 2.19%
Portfolio = 14.6% – 12.03% = 2.57%

Question 35.
Ramesh wants to invest in stock market. He has got the following information about individual securities.

Security	1 Expected Return	Beta	σ2c.
A	15	1.5	40
B	12	2	20
C	10	2.5	30
D	09	1	10
E	08	1.2	20
F	14	1.5	30

Market index variance is 10 per cent and the risk free rate of return is 7%. What should be the optimum portfolio assuming no short sales? [May 2010] [12 Marks]
Answer:
Securities need to be ranked on the basis of excess return to beta ratio from highest to the lowest.

Ranked Table:

CA = 10 × 0.30/ [1 + (10 × 0.056)] = 1.923
CF = 10 × 0.65/ [1 + (10 × 0.131)] = 2.814
CB = 10 × 1.1.15 / [1 + (10 × 0.331)] = 2.668
CD = 10 × 1.35 / [1 + (10 × 0.431)] = 2.542
CC = 10 × 1.60 / [1 + (10 × 0.639)] = 2.165
CE = 10 × 1.66 / [1 + (10 × 0.7111)] = 2.047

Cut off point is 2.814
Z_i = \(\frac{\beta_i}{\sigma^2 e_i}\left[\frac{R_i-R_f}{\beta_i}-c\right]\)
Z_A = 15/40 (5.33 -2.814) = 0.09435
Z_F = 15/30 (4.67-2.814) = 0.09435
X_A = 0.09435/[0.09435 +0.0928] = 50.41%
X_F = 0.0928/[0.09435 + 0.0928] = 49.59%
Funds to be invested in security A & F are 50.41% and 49.59% respectively.

Question 36.
Equity of KGF Ltd. (KGFL) is ₹ 410 Crores, its debt is worth ₹ 170 Crores. Printer Division segments Value is attributable to 74%, which has an asset Beta (β_p) of 1.45, balance value is applied on spares and Consumables division, which has an Asset Beta (β_sc) of 1.20. KGFL Debt beta (β_n) is 0.24.
You are required to calculate:
(i) Equity Beta (β_E)
(ii) Ascertain Equity Beta (β_E), If KGF Ltd. decides to changes its Debt Equity Position by raising further debt and buying back of equity to have its Debt Equity Ratio at 1.90. Assume that the present Debt Beta(β_D1) is 0.35 and any further funds raised by way of Debt will have a Beta (β_D2) of 0.40.
(iii) Whether the new Equity Beta (β_E) justifies increases in the value of equity on account of leverage? [May 2019][8 Marks]
Answer:
(i) Equity Beta of KGFL Ltd.:
Equity Beta of KGFL Ltd. will be the weighted average of the equity Beta of its two divisions. The weight of printer division (p) is 0.74 and the weight of Spares and Consumables (SC) division is 0.24. The equity debt proportion of the company is \(\frac{E}{E+D}=\frac{410}{410+170}\) = o 7069
therefore the balance is debt i.e. (1 – 0.7069) = 0.2931.
Using formula:
(β_A) = β_E × \(\frac{E}{E+D}\) + β_D × \(\frac{D}{E+D}\)
Equity Beta of the two divisions:

Equity Beta of KGFL Ltd = 1.95(0.74) + 1.60(0.26)
= 1.443 + 0.416
= 1.859 = 1.86 approx.

(ii) If Debt equity ratio is 1.9 and equity is 1, it means the proportion of debt will be \(\) = 0.655 and equity proportion will be \(\) = 0.345. This means that debt will be to the tune of ₹ 380 (0.655 × 580) and equity will be 200 (0.345 × 580). Since the existing debt is ₹ 170 crores, the balance 210 crores (380 – 170) will be freshly raised. The new overall debt Beta will be =
β_D1 × \(\frac{\mathrm{D} 1}{\mathrm{D} 1+\mathrm{D} 2}\) + β_D1 × \(\frac{\mathrm{D} 2}{\mathrm{D} 1+\mathrm{D} 2}\)
= 0.35 × \(\frac{170}{380}\) + 0.40 × \(\frac{210}{380}\) = 0.3776
= 0.38 approx.
Assuming the asset Beta of the two divisions is still the same, the new equity beta of KGFL will be :

Equity Beta of KGFL Ltd = 3.48(0.74) + 2.76(0.26) = 2.575 +0.7176
= 3.292 = 3.3 approx.

(iii) Yes, it justifies the increase as it leads to increase in the value of Equity due to increase in Beta.

Deduction for Special Economic Zone – CA Final DT Question Bank is designed strictly as per the latest syllabus and exam pattern.

Deduction for Special Economic Zone – CA Final DT Question Bank

Taxation of Co-operative Societies

Question 1.
Chennai Co-operative Society derives income during financial year 2020-21 from the following sources:

1. Income from processing with the aid of power – ₹ 20,000
2. Income from collective disposal of labour of its members – ₹ 30,000
3.  Interest from another co-operative society – ₹ 15,000
4. Income from House property – ₹ 90,000
5. Income from other business – ₹ 60,000
6. Income by way of dividend from another co-operative society – ₹ 25,000

Determine its total income (without considering Sec. 115BAD) for A.Y. 2021-22. [CA Final Nov. 2016] [5 Marks]
Answer:
Computation of Total income for Chennai Co-operative Society A.Y. 2021 -22

Deduction for Special Economic Zone

Question 2.
X Ltd. has an undertaking (Unit X) in Special Economic Zone (SEZ) and another undertaking (Unit Y) in Free Trade Zone (FTZ) for manufacturing of computer software. It furnishes the following particulars of its 2nd year of operations ending 31st March, 2021:

	Unit X (₹ in lakhs)	Unit Y (₹ in lakhs)
Total sales	360	240
Export sales (inclusive of ₹ 20 lakh onsite develop­ment of software outside India by Unit X)	240	20
Profit earned (after claim of bad debts u/s 36(l)(vii) in Unit X)	126	72

Plant and machinery used in the business has been depreciated at 15% on straight line method (SLM) basis and depreciation of ₹ 18 lakh was charged to Profit and Loss Account in the proportion of sales during the previous year. ₹ 200 lakh were realized out of export sales in time and balance of ₹ 40 lakh becomes irrecoverable due to bankruptcy of one of the foreign buyers in Unit X. [CA Final May 2012] [10 Marks]
Answer:
Depreciation of the second year on straight line method at the rate of 15% is ₹ 18 lakh.
Actual cost of plant and machinery is ₹ 120 lakh (i.e. ₹ 18 lakh + 0.15).
Depreciation under section 32 will be calculated as follows:

Question 3.
X Company engaged in developing and exporting software is having two units, namely Unit A and Unit-B, Unit A is setup in Special Economic Zone (SEZ) and Unit B does not fall under section 10AA of the Act. Company furnishes the following information relating to its 3rd year of operation ended on 31.03.2021:
(₹ in lacs)

Items	Unit-A	Unit-B
Export Sales	600	780
Domestic Sales	100	220
Duty Draw Back	19	35
Profit on sale of Import Entitlement	12	NIL
Salaries Paid	270	160
Other Expenses	210	260
Net Profit of the year	251	615

Additional Information:
Unit A: Expenses of 12 lakhs are disallowable u/s 43B and sales proceeds in convertible foreign exchange received in India by 30.09.2021 amounted to ₹ 520 lakhs. Export sales of ₹ 600 lakhs include freight of ₹ 100 lakhs and realization of ₹ 520 lakhs includes amount of insurance and freight charges of ₹ 70 lakhs.

Unit B: Realisation of export sales in convertible foreign exchange received in India by 30.09.2021 was of ₹ 690 lakhs. Expenses charged and are to be disallowed as per section 40A(3) of Act are of ₹ 60 lakhs.

Compute the total income of X Company for the A.Y. 2021 -22 after claiming deduction under section 10AA. [CA Final Nov. 2017] [4 Marks]
Answer:

Note: Computation of Deduction under section 10AA

Export Turnover includes only the F.O.13. value of exports realization and therefore, insurance and freight shall be excluded.
Expoil Turnover = ₹ 520 Lakhs (Realization) – ₹ 70 Lakhs (Insurance & Freight)
= ₹ 450 lakhs
Total Turnover F.O.B. value of Export + Domestic Sales
= ₹ 500 lakhs (₹ 600 lakhs – ₹ 100 lakhs) + ₹ 100 lakhs
= ₹ 600 Lakhs
As per Supreme Court in Liberty India; Dut Drawback and profit on sales of import entitlement license is not eligible for deduction under section 10AA.
∴ Profits of Business From Unit A for the purpose of deduction u/s 10AA
= ₹ 263 lakhs – ₹ 19 lakhs – ₹ 12 lakhs
= ₹ 232 lakhs
Deduction under section 10AA = ₹ 232 Lakhs × ₹ 450/₹ 600
= ₹ 174 Lakhs

Deductions from Gross Total Income – CA Final DT Question Bank is designed strictly as per the latest syllabus and exam pattern.

Deductions from Gross Total Income – CA Final DT Question Bank

Question 1.
Gurudev Engineers Pvt. Ltd. is running an industrial undertaking whose profits are eligible for deduction u/s 80-IA. During the year ended 31.03.2021, the undertaking was engaged in eligible business referred to in section 80-IA(4), which however, consisted solely of executing works contract awarded by the State Government. Is the assessee eligible to claim deduction u/s 80-IA(4) in respect of profits derived from this undertaking? [CA Final May 2010] [2 Marks]
Answer:
Section 80-IA(l) provides a ten year tax holiday in respect of profits and gains derived by an undertaking or an enterprise from an eligible business i.e., business referred to in sub-section (4).

The Explanation to the said section clarifies that the tax holiday u/s 80-IA would not be available in relation to a business referred to in sub-section (4) which is in the nature of a works contract awarded by any person (including the C.G. and S.G.) and executed by the undertaking or enterprise referred to in section 80-IA(1).

Therefore, the assessee cannot claim deduction u/s 80-IA(4) in respect of the profits derived from this undertaking for the A.Y. 2021 -22, since, during the year ended 31.3.2021, the undertaking was solely engaged in executing works contract awarded by the State Government.

Question 2.
Following issues have been raised by Navi Limited in connection with its eligibility for claiming deduction under section 80-IB for your consideration and advice for the assessment year 2021 -22:
(i) It operates two separate industrial units. One unit is eligible for deduction under section 80-IB, while the other unit is not eligible for such deduction. If the eligible unit has profit and the other unit has loss, should it claim deduction after setting off the loss of the other unit against profit of the eligible unit?

(ii) Its profit from one unit includes sale of import entitlement, duty drawback and interest from customers for delayed payment. Is it permissible to claim deduction on these items of income? [CA Final May 2010] [7Marks]
Answer:
(i) Section 80-IB(13) provides that the provisions contained in section 80-IA(5) shall, so far as may be, apply to the eligible business u/s 80-IB. Accordingly, for the purpose of computing the deduction under section 80-IB, the profits and gains of an eligible business shall be computed as if such eligible business was the only source of income of the assessee. Therefore, Navi Limited should claim deduction under section 80-IB on profit from the eligible unit without setting off loss suffered in the other unit. It may be noted that the aggregate deduction under Chapter VIA, however, cannot exceed the gross total income of the assessee.

(ii) Under section 80-IB, where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking referred to in the section, there shall be allowed, in computing the total income of the assessee, a deduction from such profits and gains at the specified percentage and for such number of years as specified in the section. In CIT vs. Sterling Foods (1999)(SQ and Liberty India vs. CIT2009)(SQ), it was held that sale of import entitlement and duty drawback cannot be construed as income derived from industrial undertaking. Therefore, such income cannot be included in computing income for the purpose of deduction under section 80-IB.

Interest income derived by an undertaking on delayed collection of sale proceeds shall be treated as income derived from the industrial undertaking, and therefore, the same would be eligible for deduction under section 80-IB.

Question 3.
Madhvi, a resident individual and self-employed, furnished the following particulars for year ended 31-03-2021:

	₹
Gross total income	6,00,000
Housing loan principal repayment. The property is under construction at Jaipur as on 31-3-2021.	1,10,000
Principal repayment of housing loan from a relative. This property is self-occupied situated at Jodhpur.	50,000
Contribution to Public Provident Fund in the name of her mother.	70,000

She deposited ₹ 15,000 per month in her account under a pension scheme notified by the Central Government.

Compute total income of Ms. Madhvi for the Assessment Year 2021-22 stating reasons for the deduction eligible under appropriate provisions of Chapter VI-A. [CA Final Nov. 2011] [5 Marks]
Answer:
Computation of total income of Ms. Madhvi for the A.Y. 2021-22

Notes:
(i) As per section 80C, the deduction for principal repayment of housing loan is provided only in respect of a house property whose income is chargeable to tax under the head ‘Income from house property’. As the house property at Jaipur is still under construction, no income is chargeable to tax under the head “Income from house property”. Hence, no deduction would be available under section 80C for principal repayment of the housing loan for property under construction.

(ii) The deduction for principal repayment of housing loan under section 80C is provided only in respect of the loan taken from the specified institutions (like banks, Life Insurance Corporation of India, National Housing Bank, specified employer etc.). Thus, loan from, a relative does not qualify for deduction u/s 80C.

(iii) The contribution to public provident fund (PPF) is allowed as deduction only if it is in the name of specified persons mentioned in section 80C, namely, self, spouse or any child of such individual. Since mother of the individual is not a specified person as per section 80C, no deduction would be available.

(iv) The deduction u/s80CCD(1) shall be an amount not exceeding 20% of the gross total income for a self-employed individual. Therefore, Ms. Madhvi shall be allowed deduction of ₹ 1,20,000 (₹ 6,00,000 X 20%).

(v) The total amount deposited to pension scheme notified by the Central Government is ₹ 1,80,000 (₹ 15,000 × 12 months). Out of which ₹ 1,20,000 has been claimed as deduction u/ s 80CCD(1). So for remaining ₹ 60,000, Ms. Madhvi is eligible for additional deduction to the extent of ₹ 50,000 u/s 80CCD(1B) in respect of such amount deposited.

Question 4.
A company which is entitled to claim deduction under section 80-IB has received duty drawback under a scheme framed by the Central Government under the Customs Act, 1962. Can such duty drawback form part of the profit of eligible undertaking for the purpose of deduction u/s 80-IB? [CA Final Nov. 2012] [3 Marks]
Answer:
Section 80-IB provides for allowing deduction in respect of profits and gains derived from eligible business of the industrial undertaking. The issue under consideration is whether duty drawback can be regarded as “profits and gains derived from eligible business of the industrial undertaking”.

For a receipt to be treated as having been “derived from” the industrial undertaking, the same should be directly and inextricably connected with the business of the industrial undertaking. The connection should be direct and not remote.

The facts of the case are similar to the facts in Liberty India v. CIT (2009), where the Supreme Court held that export incentives like duty drawback receipts, DEPB benefits are on account of statutory provisions or schemes framed by the Central Government and do not form part of profits of the eligible undertaking for the purposes of Sec. 80-IA and 80-IB.

Applying the same rationale to the present case, duty drawback would not form part of profit of eligible undertaking for the purpose of deduction under section 80-IB.

Question 5.
Mr. K, who has attained 63 years, has the following income during the previous year 2020-21:

• Salary Income (computed) ₹ 6,80,000
• Interest on savings bank account with Allahabad Bank ₹ 16,000

Other particulars given by Mr. K are as under:

1. Insurance premium paid to Max Life Insurance Ltd. amounting to ₹ 25,000 under a policy taken on life of his son. The policy was taken on 20th July, 2011 and the sum assured is ₹ 1,80,000.
2. Insurance premium paid to Life Insurance Corporation of India amounting to ₹ 22,000 under a policy taken on his life on 20th April, 2014 and the sum assured is ₹ 2,00,000.
3. Premium of ₹ 48,000 paid by cheque on health insurance for self to Central Government Health Scheme and payment in cash of ? 5,000 to a hospital for preventive health check-up for self.

Compute the total income of Mr. K for Assessment Year 2021-22 on the basis of the above particulars. [CA Final May 2013] [6 Marks]
Answer:
Computation of Total Income of Mr. K for the A.Y. 2021-22

Notes:
(1) Mr. K can claim deduction u/s 80C in respect ol insurance premium paid by him in respect of a policy taken on the life of his son. Since the policy was issued before 1.4.2012, the premium paid shall be allowed as deduction upto 20% of sum assured (i.e., upto ₹ 36,000, being 20% of ₹ 1,80,000). Since the insurance premium of ₹ 25,000 paid is within this limit, the same is fully allowable as deduction u/s 80C.

(2) In respect of premium of ₹ 22,000 paid by Mr. K to LIC under an insurance policy taken on his own life, the deduction u/s 80C would be restricted to 10% of sum assured, since the premium is paid in respect of a life insurance policy taken on or after 1.4.2012. Therefore, the deduction under section 80C in respect of this policy would be restricted to ₹ 20,000, being 10% of ₹ 2,00,000.

(3) Deduction u/s 80D is allowable in respect of health insurance premium paid by any mode other than cash and expenses on preventive health check-up (upto ₹ 5,000) paid by any mode, including cash. Therefore, both the premium of ₹ 48,000 paid by cheque and preventive health check-up of ₹ 5,000 paid by cash qualifies for deduction u/s 80D. However, the deduction would be restricted to ₹ 50,000, which is the overall limit u/s 80D in respect of an individual, who is of the age of 60 years or more at any time during the previous year.

(4) As per section 80TTB, deduction shall be allowed from the gross total income of an individual who is a senior citizen in respect of income by way of deposit in the savings bank account included in the assessee’s gross total income, subject to a maximum of ₹ 50,000.

Question 6.
X Ltd. has two units, unit ‘N’ and unit ‘Y’. Unit ‘N’ engaged in the business of power generation installed a windmill and had a profit of ₹ 100 lakhs in A.Y. 2021-22. X Ltd. has claimed depreciation of ₹ 120 lakhs on windmill against the profit of ₹ 100 lakhs from power generation business which was eligible for deduction u/s 80-IA. Unit ‘Y engaged in manufacturing of wires, non-eligible business, had a profit of ₹ 70 lakhs for A.Y. 2021-22.

The loss of ₹ 20 lakhs, i.e. balance depreciation not set off pertaining to unit ‘NT’ was set-off against the profits of unit ‘Y’ carrying on non-eligible business, by the assessee, X Ltd. The A.O. was of the view that depreciation relating to a business eligible for deduction u/s 80-IA cannot be set-off against non-eligible business income. Hence, unabsorbed depreciation should be carried forward to the subsequent year to be set off against eligible business income of the assessee of that year. Give your views on the correctness of the action of the A.O.[C4 Final Nov. 2014] [4 Marks]
Answer:
The facts of the case are similar to the facts in CIT v. Swarnagiri Wire Insulations Pvt. Ltd. (2012), the Karnataka High Court observed that it is a generally accepted principle that the deeming provision of a particular section cannot be breathed into another section. Therefore, the deeming provision contained in section 80-IA(5) cannot override the provisions of section 70(1).

Where the assessee incurs loss in eligible business on account of claiming depreciation, section 80-IA becomes insignificant, since there is no profit from which this deduction can be claimed. It is thereafter that section 70(1) comes into play, whereby an assessee is entitled to set oil the losses from one source against income from another source under the same head of income.

Therefore, the court held that the assessee was entitled to the benefit of set off of loss of eligible business against the profits of non-eligible business. However, once set-off is allowed under section 70(1) against income from another source under the same head, a deduction to such extent is not possible in any subsequent assessment year i.e., the loss (arising on account of balance depreciation of eligible business) so set-oil under section 70(1) has to be first deducted while computing profits eligible for deduction under section 80-IA in the subsequent year.

In this case, X Ltd. had incurred loss in eligible business (power generation) on account of claiming depreciation of ₹ 120 lakhs. Accordingly, X Ltd. is entitled to the benefit of set off of loss of ₹ 20 lakhs (representing balance depreciation not set-off) pertaining to Unit N engaged in eligible business of power generation against profit of ₹ 70 lakhs of Unit Y carrying on non-eligible business. Therefore, the net profit of ₹ 50 lakhs would be taxable in the A.Y. 2021-22. Also, in the A.Y. 2022-23, the net profits of Unit N have to be reduced by ₹ 20 lakhs for computing the profits eligible for deduction under section 80-IA in that year.

Therefore, the action of the Assessing Officer in not permitting set-off of loss of eligible business against profits of non-eligible business in this case is, therefore, not correct.

Question 7.
With brief reasons answer the following in terms of Chapter VI-A of, the Income-tax Act, 1961:
(1) Mr. Jaju deposited ₹ 65,000 with Life Insurance Corporation for the maintenance of his mother who suffers from disability of 90%. She is wholly dependent on him. How much is deductible?
(2) Mr. Shiva has gross total income of ₹ 3,75,000. Compute deduction available u/s 80G

Donations made to	₹	Payment mode
National Children’s Fund	25,000	By cheque
Prime Minister’s Drought Relief Fund	30,000	By cheque
National Blood Transfu­sion Council	40,000	By cash
National Illness Assistance Fund	4,000	Equally by cash and cheque.

(3) Mr. Manoj, a computer software engineer, co-authored a book on advanced computer programming along with his friend. He received ₹ 4,10,000 as lump sum royalty in March, 2021. How much of royalty is taxable? [CA Final May 2015] [6 Marks]
Answer:
(1) As per Sec. 80DD, an assessee would be eligible I or deduction u/s 80DD for the amount paid or deposited under a scheme framed by LIC or an v other insurer approved by the CBDT in respect of medical treatment including nursing, training and rehabilitation for the maintenance of a dependent relative with disability. The amount of deduction shall be ₹ 75,000 [FLAT] (in case of severe disability ₹ 1,25,000 [FLAT]), irrespective of actual amount of expenditure incurred on maintenance or treatment.

In this case, Mr. Jaju would be eligible for deduction u/s 80DD in respect of amount deposited with LIC for maintenance of his mother. As his mother is suffering from severe disability (i.e. 80% or more of one or more disabilities) and is wholly dependent on him, he would be eligible for deduction of ₹ 1,25,000.

(2) Mr. Shiva would be eligible for deduction u/s 80G in respect of the donations as follows:

Donation to	Dona­tion (₹)	Mode of donation	Donation eligible for Deduction (%)	Deduction (₹)
National Children’s Fund	25,000	Cheque	100%	25,000
Prime Minister’s Drought  Relief Fund	30,000	Cheque	50%	15,000
National Blood Transfusion Coun­cil	40,000	Cash	100%	Nil (as cash donation in excess of ₹ 2,000 disqualifies entire deduction)
National Illness As­sistance Fund	20,000	₹ 2,000 by cheque ₹ 2,000 by­cash.	100%	4,000 (The whole amount qualities for deduction, since cash donation in this case- does not exceed ₹ 2,000)

Notes:

• All the above investments made are eligible for deduction u/s ; 80G without any limit of 10% of adjusted Gross total income.
• Cash donations exceeding ₹ 2,000 are not eligible for deduction under section 80G.

(3) Mr. Manoj is eligible for deduction from gross total income u/s 80QQB, for the income derived by him on account of any lump sum consideration in the form of royalty in respect of a book, being a work of literary or scientific nature.

As the book on Advanced computer programming would fall within the description of work of literary or scientific nature, he is eligible for deduction of ₹ 3,00,000 or actual amount of royalty received, whichever is less.
Hence, Royalty of ₹ 1,10,000 is taxable.

Note: It has been assumed that Mr. Raju, Mr. Jaju and Mr. Manoj arc resident Indians.

Question 8.
VKS Ltd. is engaged in developing, operating and maintaining infrastructure facility, which qualifies for deduction u / s 80-IA of the Income-Tax Act. The company is also engaged in producing cement. Business of the infrastructure facility was commenced in the financial year 2017-18. During the financial years 2018-19, 2019-20 and 2020-21 profits/losses of the two businesses are as follows:

Financial Year	Infrastructure facility	Cement manufacturing
2018-19	(-) 100	120
2019-20	60	140
2020-21	75*	100

* includes freight subsidy of ₹ 10 lakhs under the scheme of the Central Government

Further Information:
(i) Cement manufacturing unit transferred cement of certain quality for an aggregate price of ₹ 20 lakhs. Similar quantity was sold to outside customers for ₹ 25 lakhs.
(ii) Profit of infrastructure facility business for financial year 2019-20 has been arrived at after charging purchase of consumable stores amounting to ₹ 10 lakhs from RR Ltd., a subsidiary company of VKS Ltd. as against fair market value of such items amounting to ₹ 7 lakhs.

Compute the amount admissible as deduction under section 80-IA for A.Y. 2021-22. Give working notes and the reasons in the context of statutory provisions for giving treatment to each of the items. [CA Final Nov 2017] [6 Marks]
Answer:
Computation of the taxable profit and amount admissible as deduction u/s 80-IA

Therefore, the amount admissible as deduction under section 80-IA is ₹ 30 lakh.

Notes:
1. As per Sec. 80-IA(5) for the purpose of computing deduction under this section, the profits and gains of the eligible business shall be computed as if such eligible business were the only source of income of the assessce during the relevant previous years.

Accordingly, the loss incurred in F.Y. 2018-19 would have been set off against profit from cement unit in that same year while preparing income tax computation for F.Y. 2018-19. But, for the purpose of computation of profit of the eligible business admissible for deduction u/s 80-IA for subsequent years, we have to consider that the loss of ₹ 100 lakh is carried forward in the next years. Now, in subsequent years, the entire profit of eligible business will not be admissible for deduction u/s 80-IA but only balance profit, if any, after set off of this loss would be eligible for deduction.

Thus, in the given question, tor computing the profit eligible for deduction u/s 80-IA, loss of ₹ 100 for F.Y. 2018-19 will be considered
to be set off to the extent of ₹ 60 lakh in F.Y. 2019-20 and balance of ₹ 40 lakhs against profit of F.Y. 2020-21.

As per Sec. 80-IA(8), where any goods or services held for the purposes of any other business carried on by the assessee are transferred to the eligible business and the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods or services as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer had been made at the market value of such goods or services as on that date. Since, in the given case, we have made inter-unit purchase of cement at the value less than the market value by ₹ 5 lakh, the excess profit of eligible unit will not be considered while computing profit of such eligible business for the purpose of deduction u/s 80:IA.

A similar adjustment needs to be done u/s 80-IA(10) in case of transaction in goods or services with an assessee having close connection with the assessee. In the given case, we have purchased consumable stores from Subsidiary Company. However, the said transaction has not inflated the profit of eligible business but has rather reduced the profit. And so the same shall be disallowed u/s 40A(2) but no adjustment needs to be done for computing profit of such eligible business for the purpose of deduction u/s 80-IA.

So, out of the profit of ₹ 75 lakh of the eligible business, the profit of the eligible business for the purpose of deduction would be only ₹ 70 lakh after adjustment of excess profit of ₹ 5 lakh as per 80-IA(8). Now, we will have to first set off the balance loss of F.Y. 2017-18 of 40 lakh against this amount of 70 lakh and therefore profit eligible for deduction u/s 80-IA would be only ₹ 30 lakh.

Quantum of deduction u/s 80-IA is 100% of the profit eligible for deduction for 10 consecutive assessment years out of initial 20 assessment years. So, 100% of ₹ 30 lakh i.e. ₹ 30 lakh would be the amount admissible as deduction u/s 80-IA.

2. The Supreme Court, in CIT v. Meghalaya Steels Ltd. (2016), has held that the freight subsidy arising out of the scheme of Government can be treated as a “Profit derived from the business” for the purpose of section 80-IA. Thus, freight subsidy of ₹ 10 lakh would form part of the profit eligible for deduction u/s 80-IA.

Question 9.
Govind Charitable Trust registered u/s 12AA is engaged in imparting Yoga to the public. Its aggregate annual receipt was ₹ 60 lakhs and it spent only ₹ 40 lakhs by way of remuneration to Yoga teachers and by way of administration expenses. The trust applied for approval u/s 80G to the CIT. The application was rejected on the ground that it had not spent 85% of its income for charitable purposes. Decide the validity of the rival contentions. [CA Final May 2018 (Old & New Syllabus)] [4 Marks]
Answer:
The issue under consideration is whether the Commissioner can reject an application for grant of approval u/s 80G on the ground that the trust has failed to apply 85% of its income for charitable purposes.

The facts of the case are similar to the case of CIT v. Shree Govindbhai Jethalal Nathavani Charitable Trust (2015), where the Gujarat High Court has referred to its own decision in the case of N.N. Desai Charitable Trust v. CIT (2000) in which it was observed that, while considering the application for the purpose of Section 80G, the authority cannot act as an assessing authority and the enquiry should be confined to finding out if the institution satisfies the prescribed conditions.

The High Court also observed that Sec. 80G does not relate to assessment of the trust or the institution whose income is not liable to be included in the computation of taxable income under various provisions of the Act instead it is related to giving deduction in respect of donations made by a person to such trusts and institutions. The High Court, therefore, set aside the order passed by the Commissioner refusing to grant registration u/s 80G(5) to the assessee-trust due to the reason that it has not applied 85% of its income for charitable purposes.

By applying the Gujarat High Court decision in this case, the action of the Commissioner to reject the application on the ground that it had not spent 85% of its income [or charitable purposes is not valid.

Question 10.
The Gross Total Income of Mr. Bharadwaj who is a resident of Varanasi for the year ended 31-03-2021 is ₹ 15 lakhs.
Further:

1. He has contributed ₹ 2 lakh towards Clean Ganga Fund set up by the Central Government.
2. He has incurred medical expenditure of ₹ 55,000 towards surgery for his grandmother who is 85 years of age. (No Premium is paid to keep In force an Insurance on her health)
3. He has donated ₹ 2 lakhs in cheque and ₹ 50,000 in cash to a political party during Its annual conference of which he is a member.
4. Repayment of housing loan instalment of 1 lakh during the financial year to his employer XYZ Private Limited.

Discuss the allowable deduction to Mr. Bharadwaj from the above information. [CA Final May 2018 {New Syllabus)] [6 Marks]
Answer:
Computation of Total Income of Mr. Bharadwaj for the A.Y. 2021-22

	₹
Gross Total Income	15,00,000
Less: Deductions under Chapter VI-A
Deduction u/s 80G (Note 1)	2,00,000
Deduction u/s 80GGC (Note 3)	2,00,000
Total Income	11,00,000

Notes:
1. As per Sec. 80G, where the assessee makes a contribution to the Clean Ganga Fund, then he shall be eligible for deduction of the whole of the amount deposited in such fund without any qualifying limit provided the contribution has been made by any mode other than cash except for the cash donations not exceeding ₹ 2,000. In this case, Mr. Bharadwaj has contributed ₹ 2,00,000 to the Clean Ganga Fund set up by the C.G. and therefore, he shall be eligible for 10096 of the amount contributed to such fund, by assuming that the amount has been contributed by any mode other than cash.

2. As per Sec. 80D, the assessee shall be eligible for deduction upto ₹ 50,000 in respect of payment made of medical expenditure for himself or spouse or dependent children or parents who is a senior citizen, provided no payment has been made to keep in force’ an insurance ” on the health of such person. Senior citizen means an individual who is resident in India and has completed the age of 60 years or more at any time during the previous year. However, in this case, no deduction shall be available to Mr. Bharadwaj u/s 80D, since he incurred medical expenditure towards the surgery of his grandmother.

3. As per Sec. 80GGC, the deduction shall be available to any person, except local authority and every artificial juridical person wholly or partly funded by the Government, for the amount contributed to the political party. However, no deduction shall be allowed in respect of any sum contributed by way of cash. Therefore, Mr. Bharadwaj shall be eligible for deduction of ₹ 2,00,000 u/ s 80GGC in respect of amount donated to the politic party by cheque and no deduction- shall be available in respect of ₹ 50,000 donated by cash.

4. As per Sec. 80C, the individual-assessee shall be eligible for deduction in respect of repayment of housing loan made to his employer where such employer is a public company or public sector company. However, in this case, Mr. Bharadwaj has made repayment to his employer XYZ Pvt. Ltd, and since, the employer is a private company, Mr. Bharadwaj shall not be eligible for deduction u/s 80C.

Question 11.
Denim Ltd. was incorporated on 01.04.2020 to carry on the business of innovation, development, deployment and commercialization of new processes driven by technology. It holds a certificate of eligible business from the notified IBMC (Inter Ministerial Board of Certification).

Its total turnover and the profits and gains from such business for the P.Y. 2020-21 and expected turnover and profits and gains in the following years are as follows:

Particulars	P.Y. 2020-21	P.Y. 21-22	P.Y. 22-23	P.Y. 23-24	P.Y. 24-25	P.Y. 25-26	P.Y. 26-27
Total Turnover in Crores	50	55	62	68	78	88	96
Profits (Losses) in Crores	(2.52)	(1.5)	6.5	8.25	9.5	8	9.50

Is Denim Ltd. eligible for any benefit under the provisions of the Income Tax Act, 1961? If yes, what is the benefit available? [CA Final May 2018 (New Syllabus)] [5 Marks]
Answer:
As per Sec. 80-IAC, the deduction is available to the assessee, being an eligible start-up whose gross total income includes any profits and gains from eligible business of innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.

“Eligible start-up” means a company or a LLP engaged in eligible business and fulfils the following conditions:
(a) it is incorporated on or after 01.04.2016 but before 01.04.2021;
(b) the total turnover of its business does not exceed ₹ 100 crores in the previous year relevant to the assessment year for which deduction is claimed;
(c) it holds a certificate of eligible business from the Inter Ministerial Board of Certification as notified by the Central Government.

Deduction shall be 100% of the profits and gains derived from such eligible business for any 3 Consecutive Assessment Years out of 10 Assessment Years beginning from the year in which eligible start-up is incorporated and the : deduction shall not exceed the profits derived from the business of start-up.

If Mr. Sarthak invest whole of the sale proceeds from sale of residential house in Surat in shares of eligible start-up, he will be eligible for exemption for whole of the long term capital gains from sale of such residential house property in Surat and there will be no taxable capital gains.

If he does not invest such sale proceeds in the equity shares of eligible start-up, he shall not be eligible to claim exemption u/s 54GB and has to pay tax @ 10% u/s 112 on such long term capital gains from sale of residential house property in Surat. If he pays tax on such long term capital gains, he has to borrow more amount from the bank or has to asked Miss Juhi to contribute more amount than ₹ 2 crores, as the case may be.

If Mr. Sarthak borrows ₹ 2 crores from bank, then he has to pay interest @ 13% p.a. on such borrowing and can claim deduction u/s 36(1)(iii). In this case, whole of the profits from eligible start-up will be of Mr. Sarthak. But, there will be risk that Mr. Sarthak may not be able to pay interest amount on such borrowings.

However, if Mr. Sarthak accepts Miss Juhi as co-promoter, he does not have to pay any interest but have to share profits from eligible start-up with Miss Juhi. Also, there will be no risk of non-payment of interest amount.

Question 13.
ABC Ltd., a developer, is engaged in the business of developing of Special Economic Zones, notified on or after 1st April 2005 under the – SEZ Act, 2005. It was established in the previous year 2015-16. It had exercised its option for claiming deduction under section 80-IAB from the Assessment Year 2018-19. It received the following incomes during the previous year 2020-21:

Income from the maintenance of SEZ : ₹ 50,40,000
Income from lease rent from letting out of buildings along with other amenities in SEZ : ₹ 14,25,000
Interest received from bank deposits (from the refundable security deposits received from lessees) : ₹ 9,50,000

(1) Calculate the amount of deduction available to ABC Ltd. for the A.Y. 2021-22.
(2) On 1st April, 2021, it transferred the operation and maintenance of the SEZ to another company, DEF Ltd. Now, DEF Ltd. wants to claim deduction u/s 80-IAB in respect of the income derived from such maintenance of SEZ as was available for ABC Ltd. Comment whether the contention of DEF Ltd. is valid in law? [CA Final Nov. 2019 (New Syllabus)] [4 Marks]
Answer:
(1) As per Sec. 80-IAB, Developer of a SEZ, notified on or after 01.04.2005 shall be eligible for deduction of 100% of the profits from the business of developing SEZ.

Deduction shall be available for any 10 consecutive assessment years out of 15 assessment years beginning from the year in which SEZ is notified.

Since, ABC Ltd., a SEZ developer, has exercised the option for claiming deduction u / s 80-IAB from A.Y. 2018-19, it is eligible to claim deduction of 100% of the profits from business of developing SEZ

Computation of Deduction available to ABC Ltd. for A.Y. 2021-22

Note: Interest received from bank deposits from the refundable security deposits received from lessees is not an activity relating to SEZ development and thus shall not be eligible for deduction.

(2) Where the assessee transfers the operation or maintenarice of SEZ to another developer, then the transferee shall be entitled to deduction for the unexpired period of total 10 years. On 01.04.2021, ABC Ltd. has transferred the operations & maintenance of SEZ to another company, DEF Ltd. and as per provisions of 80-IAB the transferee, (i.e. DEF Ltd.) can claim deduction of income derived from such maintenance of SEZ but only for the remaining period out of 10 years.

Compromises, Arrangements and Amalgamations – CA Final Law Study Material is designed strictly as per the latest syllabus and exam pattern.

Compromises, Arrangements and Amalgamations – CA Final Law Study Material

Question 1.
A meeting of members of ABC Limited was convened under the orders of the Court to consider a scheme of compromise and arrangement. Notice of the meeting was sent in the prescribed manner to all the 600 members holding in the aggregate 2 5,00,000 shares. The meeting was attended by 450 members holding 15,00,000 shares, 210 members holding 11,00,000 shares voted in favour of the scheme. 180 members holding 3,00,000 shares voted against the scheme. The remaining members abstained from voting. Examine with reference to the relevant provisions of the Companies Act, 2013 whether the scheme is approved by the requisite majority ;
Answer:
Determination of Approval of Scheme of Compromise and Arrangement:

Sec. 230(6) of the Companies Act, 2013 provides that where at a meeting held, majority of persons representing 3/4th in value of the creditors, or class of creditors or members or class of members, as the case may be, voting in person or by proxy or by postal ballot, agree to any compromise or arrangement and if such compromise or arrangement is sanctioned by the Tribunal by an order, the same shall be binding on the company, all the creditors, or class of creditors or members or class of members, as the case may be, or, in case of a company being wound up, on the liquidator and the contributories of the company.

Requirement as stated u/s 230(6) is dual in nature. On one side, a simple majority of the person who vote is required. On another side, the person who voted in favour must hold 3/4th value. In case of voting by members, value is to be computed with reference to paid-up capital held by members present and voting at the meeting.

In this case out of 600 members, 450 members attended the meeting, but only 390 members voted at the meeting. 210 members holding 11,00,000 shares voted in favour of the scheme. 180 members holding 3,00,000 shares voted against the scheme.

• As 210 members voted in favour of the scheme the requirement relating to majority in number [i.e. 196) is satisfied.
• Members who voted in favour of the scheme hold 11,00,000 shares, which is more than 3/4th of total shareholding of the members who voted [3/4th of (11,00,000 + 3,00,000) = 10,50,000].

Conclusion: Scheme is approved by requisite majority as requirement of number (Simple majority) as well as value (3/4th majority) both are fulfilled.

Question 2.
A meeting of members of DEF Limited was convened under the orders of the Court for the purpose of considering a scheme of compromise and arrangement. The meeting was attended by 300 members holding 9,00,000 shares. 120 members holding 7,00,000 shares in the aggregate voted for the scheme. 140 members holding 2,00,000 shares in aggregate voted against the scheme. 40 members holding 1,00,000 shares abstained from voting. Examine with reference to the relevant provisions of the Companies Act, 2013 whether the scheme was approved by the requisite majority? [RTP-May 18]
Answer:
Determination of Approval of Scheme of Compromise and Arrangement:

Sec. 230(6) of the Companies Act, 2013 provides that where at a meeting held, majority of persons representing 3/4th in value of the creditors, or class of creditors or members or class of members, as the case may be, voting in person or by proxy or by postal ballot, agree to any compromise or arrangement and if such compromise or arrangement is sanctioned by the Tribunal by an order, the same shall be binding on the company, all the creditors, or class of creditors or members or class of members, as the case may be, or, in case of a company being wound up, on the liquidator and the contributories of the company.

Requirement as stated u/s 230(6) is dual in nature. On one side, a simple majority of the person who vote is required. On another side, the person who voted in favour must hold 3/4th value. In case of voting by members, value is to be computed with reference to paid-up capital held by members present and voting at the meeting.

In this case 300 members attended the meeting, but only 260 members voted at the meeting. 120 members holding 7,00,000 shares voted in favour of the scheme. 140 members holding 2,00,000 shares voted against the scheme.

As only 120 members voted in favour of the scheme the requirement relating to majority in number [i.e. (120+140)/2 = 131] is not satisfied.

Members who voted in favour of the scheme hold 7,00,000 shares, which is more than 3/4th of total shareholding of the members who voted [3/4th of (7,00,000 + 2,00,000) = 9,00,000].

Conclusion: Scheme is not approved by requisite majority as requirement of number (Simple majority) is not fulfilled though requirement of value (3/4th majority) is being fulfilled.

Question 3.
How the compromise or arrangement scheme is adopted by the companies entering into any contract under the Companies Act, 2013? [MTP-Aug. 18]
Answer:
Adoption of Compromise and Arrangement Scheme:
Section 230 of the Companies Act, 2013 dealing with the powers of the Tribunal on the filing of application for the compromise or arrangement prescribes the procedure to be followed for compromise or arrangement scheme. Steps to be followed in this regard are:

As per Sec. 230(1), where a compromise or arrangement is proposed between a company and its creditors or any class of them; or a company and its members or any class of them, the Tribunal may, on the application of the company, creditor, member of the company, or liquidator, may order a meeting of the creditors/class of creditors, or of the members/class of members, as the case may be, to be called, held and conducted in such manner as the Tribunal directs.

As per Sec. 230(3), where a meeting is proposed to be called in pursuance of an order of the Tribunal, a notice of such meeting shall be sent to all the creditors or class of creditors, and all the members or class of members, and the debenture-holders of the company.

As per Sec. 230(4) notice shall provide that the persons to whom the notice is sent may vote in the meeting either themselves or through proxies or by postal ballot to the adoption of the compromise or arrangement within one month from the date of receipt of such notice:

Provided that any objection to the compromise or arrangement shall be made only by persons holding not less than 10% of the shareholding or having outstanding debt amounting to not less than 5% of the total outstanding debt as per the latest audited financial statement.

As per Sec. 2 30(6), where, at a meeting held, majority representing 3/4th in value of the creditors / class of creditors, or of the members/class of members, as the case may be, voting in person or by proxy or by postal ballot, agree to any compromise or arrangement and if such compromise or arrangement is sanctioned by the Tribunal by an order, the same shall be binding on the company, all the creditors/class of creditors, or of the members/class of members, as the case may be, or, in case of a company being wound up, on the liquidator appointed under this Act or under the IBC, 2016, as the case may be, and the contributories of the company.

Question 4.
A meeting of members of ABC Limited was convened as per the orders of the Court to consider a scheme of compromise and arrangement. Notice of the meeting was sent to 1000 members holding in aggregate 500000 equity shares. The meeting was attended by 800 members holding 350000 shares. 450 members holding 240000 shares voted in favour of the scheme; 200 members holding 60000 shares voted against the scheme. The remaining 150 mcnibersabstained from voting. Explain with reference to the provisions of the Companies Act, 2013, whether the scheme is approved by the requisite majority. [May 19 – New Syllabus (4 Marks)]
Answer:
Determination of Approval of Scheme of Compromise and Arrangement:

Sec. 230(6) of the Companies Act, 2013 provides that where at a meeting held, majority of persons representing 3/4th in value of the creditors, or class of creditors or members or class of members, as the case may be, voting in person or by proxy or by postal ballot, agree to any compromise or arrangement and if such compromise or arrangement is sanctioned by the Tribunal by an order, the same shall be binding on the company, all the creditors, or class of creditors or members or class of members, as the case may be, or, in case of a company being wound up, on the liquidator and the contributories of the company.

Requirement as stated u/s 23 0 (6) is dual in nature. On one side, a simple majority of the person who vote is required. On another side, the person who voted in favour must hold 3/4th value.
In case of voting by members, value is to be computed with reference to paid-up capital held by members present and voting at the meeting.

In this case out of 1,000 members, 800 members attended the meeting, but only 650 members voted at the meeting. 450 members holding 2,40,000 shares voted in favour of the scheme. 200 members holding 60,000 shares voted against the scheme.

• As 450 members voted in favour of the scheme the requirement relating to majority in number (i.e. 326] is satisfied.
• Members who voted in favour of the scheme hold 2,40,000 shares, which is more than 3/4th of total shareholding of the members who voted [3/4th of (2,40,000 + 60,000] = 2,25,000].

Conclusion: Scheme is approved by requisite majority as requirement of number (Simple majority) as well as value (3/4th majority) both are fulfilled.

Question 5.
Dragon Copper Limited was facing acute financial difficulty as operations were continuously disrupted due to
(a) non-availability of raw material
(b) successive drought in its marketing areas and loss of demand and
(c) frequent breakdown due to non-replacement of old plant and machinery. On the verge of liquidation, the Management proposes one last arrangement between creditors and the company, whereby the creditors have to forego 50% of their dues to the company. This has evoked strong protest from some of the creditors who may block the arrangement. Examine the arrangement in the light of the Companies Act, 2013 and advise the course of action/procedure to be adopted by the company to implement the same. [RTP-Nov. 19]
Or
RMP Limited was facing acute financial difficulties as operations were Continuously disrupted and the Company was facing the brunt of:
(i) Non-Availability of Raw Materials,
(ii) Loss of demand for the Company’s products,
(iii) Frequent lockdown due to workmen’s unrest.

On the verge of liquidation, the Management proposed one last arrangement between creditors and the Company, whereby, the creditors will have to forego 50% of their dues to the Company, this has evoked strong protest from some of the creditors who may block the arrangement.

Examine the arrangement in the light of the Companies Act, 2013 and advice the course of action/ procedure to be adopted by the company to implement the arrangement. [Nov. 20 – New Syllabus (4 Marks)]
Answer:
Scheme of Compromise or arrangement
As per Sec. 230(1), where a compromise or arrangement is proposed between
(a) a company and its creditors or any class of them; or
(b) a company and its members or any class of them, the Tribunal may, on the application of the company or any creditor or member of the company, or in the case of a company which is being wound up, of the liquidator (whether appointed under this Act or under the Insolvency and Bankruptcy Code, 2016), order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the Tribunal directs.

In the present case, the scheme provides for sacrifice on the part of creditors as they have to forego 50% of their dues to the company. The proposed scheme involves as a compromise or arrangement with creditors and it attracts section 230.

The procedure to be adopted by the company in this regard will involve following steps:

(i) Company must arrange to send notice of meeting to every creditor containing a statement setting forth the terms of compromise or arrangement explaining its effect. Material interest of directors, Managing Director, or manager of the company in the scheme and the effect of scheme on their interest should be fully disclosed.

(ii) Advertisement issued by the company must comply with the requirements of Sec. 230(2).

(iii) At the meetings convened, as per directions of the Tribunal, majority in number representing at least 75% in value of creditors present and voting (either in person or by proxy if allowed) must agree to compromise or arrangement.

(iv) Company must present a petition to the Tribunal for confirmation of the compromise or arrangement. The notice of application made by the company will be served on the Central Government and the Tribunal will take into consideration representation, If, any made by the Central Government.

(v) The Tribunal will sanction the scheme, if it is satisfied that the company has disclosed all material facts relating to the company e.g. latest financial position, auditor’s report on accounts of the company, pendency of investigation of company, etc.

(vi) Copy of Tribunal order must be filed with the Registrar of Companies and then only the order will come into effect. Copy of Tribunal order must be annexed to every Memorandum of Association issued thereafter.

(vii) If the Tribunal sanctions the scheme, it will be binding on all members and creditors even those who were dissenting.

Question 6.
At the meeting of the members of M/s QRS Limited, a scheme of compromise and arrangement was approved by requisite majority. The National Company Law Tribunal (NCLT) after complying the provisions, issued an Order, approving the scheme of compromise and arrangement.

List out the matters to be provided in the Order issued by NCLT under Section 230(7) of the Companies Act, 2013. When shall the Order be filed with ROC? [Nov. 19 – New Syllabus (4 Marks)]
Answer:
Particulars to be stated in the order:
As per Sec. 230(7) of the Companies Act, 2013, an order made by the Tribunal u/s 230(6), shall provide for all or any of the following matters, namely:

(a) where the compromise or arrangement provides for conversion of preference shares into equity shares, such preference shareholders shall be given an option to either obtain arrears of dividend in cash or accept equity shares equal to the value ofthe dividend payable;

(b) the protection of any class of creditors;

(c) if the compromise or arrangement results in the variation of the shareholders’ rights, it shall be given effect to under the provisions of Sec. 48;

(d) if the compromise or arrangement is agreed to by the creditors u/s 230(6), any proceedings pending before the Board for Industrial and Financial Reconstruction (BIFR) established u/s 4 of the Sick Industrial Companies (Special Provisions) Act, 1985 shall abate;

(e) such other matters including exit offer to dissenting shareholders, if any, as are in the opinion of the Tribunal necessary to effectively implement the terms of the compromise or arrangement.

Filing of order with Registrar:
As per Sec. 230(8) of the Companies Act, 2013, the order of the Tribunal shall be filed with the Registrar by the company within a period of 30 days of the receipt of the order.

Question 7.
Genuine Spares and Accessories Limited has got a good reputation in the market and has loyal customers. Due to the local competition and from unbranded spares, its turnover has gone down over the years and it had ended in red with a loss of ₹ 2.00 crore for the year ended 31.3.2021 and the same trend is expected to continue for the year ended 31.3.2022. It has got a large amount of unpaid trade creditors of ₹ 1,25,00,000 and unpaid dividends for the year ended 31.3.2017 – ₹ 1,50,000 and 31.3.2018 – ₹ 80,000.

Even during the difficult periods of business environment, the company continued the business. One of the directors has suggested in the meeting of the Board of Directors that the company can compromise or make arrangements with creditors. Mr. Magesh is the Chief Accounts Officer of the company for the last two decades. He has been entrusted with the task of finding out the possibility of making compromise with the creditors. Enumerate the formalities to be observed by the company with regard to
(i) filing of compromise application and
(ii) disclosures to be made in the application by the company. [Nov. 20 – Old Syllabus (4 Marks)]
Answer:
Scheme of Compromise with Creditors:

(i) Filing of Compromises application:
As per Sec. 230(1), where a compromise or arrangement is proposed between

(a) a company and its creditors or any class of them; or

(b) a company and its members or any class of them, the Tribunal may, on the application of the company or any creditor or member of the company, or in the case of a company which is being wound up, of the liquidator (whether appointed under this Act or under the Insolvency and Bankruptcy Code, 2016), order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the Tribunal directs.

(ii) Disclosures to be made along with application:
As per Sec. 230(2) of the Companies Act, 2013, the company or any other person, by whom an application is made u/s 230(1), shall disclose-to the Tribunal by affidavit:
(a) all material facts relating to the company, such as

• the latest financial position of the company,
• the latest auditor’s report on the accounts of the company, and
• the pendency of any investigation or proceedings against the company;

(b) reduction of share capital of the company, if any, included in the compromise or arrangement;
(c) any scheme of corporate debt restructuring consented to by not less than 75% of the secured creditors in value, including-

1. a creditor’s responsibility statement in the prescribed form;
2. safeguards for the protection of other secured and unsecured creditors;
3. report by the auditor that the fund requirements of the company after the corporate debt restructuring as approved shall conform to the liquidity test based upon the estimates provided to them by the Board;
4. where the company proposes to adopt the corporate debt restructuring guidelines specified by the RBI, a statement to that effect; and
5. a valuation report in respect of the shares and the property and all assets, tangible and intangible, movable and immovable, of the company by a registered valuer.

Question 8.
Long Lasting Ltd. applied to the Tribunal for the approval of proposed merger scheme. State the process to be compiled of proposed merger scheme. State the process to be complied with for the ed merger scheme drawn by
of the Long Lasting Ltd. under the Companies Act, 2013. [MTP-March 18]
Answer:
Process to be complied with for approval of proposed merger scheme applied to Tribunal:
Sec. 232 of Companies Act, 2013 deals with the provisions related to process followed for approval
of scheme of mergers. Accordingly:

Order by Tribunal for meeting of creditors or members: Sec. 2 32(1) provides that where an application is made to the Tribunal under section 230 of the Companies Act, 2013 for the sanctioning of a compromise or an arrangement proposed between a company and any such persons as are mentioned in that section, and it is shown to the Tribunal:

(a) that the compromise or arrangement has been proposed for the purposes of, or in connection with, a scheme for the reconstruction of the company or companies involving merger or the amalgamation of any two or more companies; and

(b) that under the scheme, the whole or any part of the undertaking, property or liabilities of any company (hereinafter referred to as the transferor company) is required to be transferred ‘to another company (hereinafter referred to as the transferee company), or is proposed to be divided among and transferred to two or more companies,

the Tribunal may on such application, order a meeting of the creditors or class of creditors or the members or class of members, as the case may be, to be called, held and conducted in such manner as the Tribunal may direct.

Circulation of information for the meeting by the merging companies/the companies in respect of which a division is proposed: Sec.232(2) states that where an order has been made by the Tribunal u/s 232(1), merging companies or the companies in respect of which a division is proposed, shall also be required to circulate the following for the meeting so ordered by the Tribunal, namely:

(a) the draft of the proposed terms of the scheme drawn up and adopted by the directors of
the merging company;
(b) confirmation that a copy of the draft scheme has been filed with the Registrar;
(c) a report adopted by the directors of the merging companies explaining effect of compromise on each class of shareholders, key managerial personnel, promoters and non-promoter shareholders laying out in particular the share exchange ratio, specifying any special valuation difficulties;
(d) the report of the expert with regard to valuation, if any;
(e) a supplementary accounting statement if the last annual accounts of any of the merging company relate to a financial year ending more than six months before the first meeting of the company summoned for the purposes of approving the scheme.

Order of tribunal on the agreement of compromise or arrangement: The Tribunal, after satisfying itself that the procedure specified u/s 232(1) & 232(2) has been complied with, may, by order, sanction the compromise or arrangement.

Question 9.
Pioneer Textiles Limited desired to amalgamate is enterprise with Latex Textiles Limited. A scheme of amalgamation for this purpose was approved by an overwhelming majority of shareholders and all creditors of both companies at meetings held under the provisions of Section 232 of the Companies Act, 2013. Thereupon it was presented to the company law tribunal for Its sanction.

While the scheme was pending in the Tribunal, some of the dissentient shareholders of Pioneer Textiles Limited requisitioned an extraordinary general meeting to negotiate with Latex Textiles Limited as according to the requisitionists the exchange ratio was not fair and reasonable.

Examine whether the directors may refuse to call the extraordinary general meeting. Also discuss the powers of the Tribunal in this respect. [May 18-New Syllabus (5 Marks)]
Answer:
Refusal to call EGM for renegotiation of Exchange Ratio in Scheme of Amalgamation:
Sec. 100(2) of Companies Act, 2013 provides that the Board shall, at the requisition made by:

(a) in the case of a company having a share capital, such number of members who hold, on the date of the receipt of the requisition, not less than 1/10th of such of the paid-up share capital of the company as on that date carries the right of voting;

(b) in the case of a company not having a share capital, such number of members who have, on the date of receipt of the requisition, not less than 1/10th of the total voting power of all the members having on the said date a right to vote,
call an extraordinary general meeting of the company within the period specified in Sec. 100(4).

In the present case, some of the shareholders requisitioned an EGM to negotiate with other company over the exchange ratio in scheme of amalgamation.
Conclusion: Directors cannot refuse calling of EGM, if the requisition is made by prescribed number of members.

Tribunal Power in this respect:

Tribunal cannot prevent shareholders from requisitioning a meeting, discussing and passing a resolution, proposing a modification to amalgamation scheme, even when scheme is pending for sanction before Tribunal. _

However, if the share exchange ratio is challenged before Tribunal, it will not disturb the scheme of amalgamation, unless the person who challenges the valuation satisfies the Tribunal that the valuation is grossly unfair.

Note: Answer given in suggested answer as issued by Board of Studies, ICAI is different. Answer as given in the Suggested answer conclude that it is not mandatory for the directors to call Extraordinary General Meeting. It is assumed that overwhelming majority signified approval by the holders of not less than 9/10th in value of shares.

Question 10.
ABC Limited was amalgamated and merged in XYZ Limited. Some workers of ABC Limited refuse to join as workers of XYZ Limited and claim compensation for premature termination of service. XYZ Limited resists the claim on the ground that their services are transferred to XYZ Limited by the order of amalgamation and merger and, therefore, the workers must join service of XYZ Limited and cannot claim any compensation. According to the provisions of the Companies Act, 2013, examine whether the workers’ contention is correct. [MTP-Oct. 18]
Answer:
Transfer of contract of service in a scheme of compromise or arrangement:

As per Sec. 232(3) of Companies Act, 2013, Tribunal, after satisfying itself that the procedure specified u/s 232(1) and (2) has been complied with, it may by order, sanction the compromise or arrangement or by a subsequent order, make provision for various matters, including there is the transfer of the employees of the transferor company to the transferee company.

However, an order u/s section 232 of the Companies Act, 2013 transferring the property, rights
and liabilities of one company to another does not automatically transfer contracts of personal service, which are in their nature, incapable of being transferred and no contract of service is thereby created between an employee of the transferor company on the one hand and the transferee company on the other.

Conclusion: In accordance with the above provisions, it may be concluded that the workers/ employees and their services cannot be transferred without their consent. Tribunal may by order safeguard the interest of the employees/workers. Therefore, the workers of ABC Ltd. (Transferor) will succeed against XYZ Ltd.

Question 11.
ABC Limited is a wholly owned subsidiary company of XYZ Limited. The Company wants to make i application for merger of Holding and Subsidiary Companies u/s 232. The Company Secretary of the XYZ Limited is of the opinion that company cannot apply for merger as per Sec. 232. The Company shall have to apply for merger as per Sec. 233 i.e. Fast Track Mer ger. Is the contention of Company Secretary being valid as per law? [MTP-May 20]
Answer:
Merger of holding company and its wholly owned subsidiary company:

Sec. 233(1) of Companies Act, 2013 states that, notwithstanding the provisions of section 230 and section 232, a scheme of merger or amalgamation may be entered into between two or more small companies or between a holding company and its wholly-owned subsidiary company or such other class or classes of companies as may be prescribed, subject to the certain conditions.

Provisions as stated under section 233 are optional in nature and not compulsory. It means that if a company wants to make application for merger as per Sec. 232, it can do so.

Conclusion: Company Secretary of the XYZ limited has erred in the law and his contention is not valid. Company has an option to choose between normal process of merger u/s 232 or fast track merger u/s 233.

Question 12.
Global Limited, a foreign company proposed to Desi Limited, an Indian company for merger of companies. State the requirement for merger as per the Companies Act, 2013. [MTP-April 18]
Answer:
Merger or Amalgamation of Company with Foreign Company:
Section 234 of the Companies Act, 2013 provides the provisions related to merger of an Indian company with a foreign company.

Accordingly, a foreign company, may with the prior approval of the Reserve Bank of India, merge into a company registered under this Act or vice versa and the terms and conditions of the scheme of merger may provide, among other things, for the payment of consideration to the shareholders of the merging company in

• cash, or
• Depository Receipts, or
• partly in cash and partly in Depository Receipts, as the’ case may be, as per the scheme to be drawn up for the purpose.

Question 13.
M/s. Unicorn Rubber Sheets Limited was incorporated and registered in the United Kingdom. M/s. Artha Rubber Sheets Manufacturing and Trading Limited is an Indian Company incorporated and registered under the provisions of the Companies Act, 2013. A scheme of compromise between the above two companies provided for an amalgamation of the English Company with the Indian company.

The CFO of the Indian Company is of the opinion that the companies being amalgamated must be companies registered in India and therefore an amalgamation with a company registered outside India is not possible. Explaining the relevant provisions of the Companies Act, 2013, examine the correctness or otherwise of the following with reference to a scheme of amalgamation of Companies:
(i) Whether the contention of the CFO is correct that the companies being amalgamated must be Companies registered in India?
(ii) What is the majority required for approving the scheme of amalgamation in a meeting of members of a company called as per the directions of the Tribunal? [May 19 – Old Syllabus (4 Marks)]
Answer:
(i) Merger or Amalgamation of Company with Foreign Company:

Section 234 of the Companies Act, 2013 provides the provisions related to merger of an Indian company with a foreign company.

Accordingly, a foreign company, may with the prior approval of the RBI, merge into a company registered under this Act or vice versa and the terms and conditions of the scheme of merger may provide, among other things, for the payment of consideration to the shareholders of the merging company in cash, or Depository Receipts, or partly in cash and partly in Depository Receipts, as the case may be, as per the scheme to be drawn up for the purpose.

Conclusion: Considering the provisions of Sec. 234, it may be concluded that contention of CFO that the companies being amalgamated must be Companies registered in India is not correct.

(ii) Majority required for approving the scheme of amalgamation
As per Sec. 230(6) of the Companies Act, 2013 majority required for approving the scheme of amalgamation is simple majority (in number) representing 3/4th in value of the creditors or class of creditors or members or class of members, as the case may be, voting in person or by proxy or by postal ballot.

Question 14.
In a scheme of reconstruction by a multinational company listed in India, the company wanted the minority shareholders to get out of the company by selling their shares back to the promoters at a price determined by the promoters. The minority shareholders were not given a choice whether they wanted to tender their shares or not.

In the meeting, there were six non-promoter shareholders who voted against the scheme, but Chairman declared that the motion was carried with an overwhelming majority of more than 90% shareholding. However, minority shareholders contended that they had a right to reject the offer. Will they succeed? [Nov. 19 – Old Syllabus (4 Marks)]
Answer:
Purchase of Minority Shareholding:

As per Sec. 236 of Companies Act, 2013, in the event of an acquirer, or a person acting in concert with such acquirer becoming registered holder of 90% or more of the issued equity share capital of a company, or in the event of any person or group of persons becoming 90% majority or holding 90% of the issued equity share capital of a company, by virtue of an amalgamation, share exchange, conversion of securities or for any other reason, such acquirer, person or group of persons, as the case may be, shall notify the company of their intention to buy the remaining equity shares.

The acquirer, person or group of persons shall offer to the minority shareholders of the company for buying the equity shares held by such shareholders at a price determined on the basis of valuation by a registered valuer in accordance with prescribed rules.

In the given case, in a scheme of reconstruction, the company wanted the minority shareholders to get out of the company by selling their shares back to the promoters at a price determined by the promoters. The minority shareholders were not given a choice whether they wanted to tender their shares or not.

In the meeting, there were 6 non-promoter shareholders who voted against the scheme, but Chairman declared that the motion was carried with an overwhelming majority of more than 90% shareholding. However, minority shareholders contended that they had a right to reject the offer.

Conclusion: Minority shareholder will succeed as Sec. 2 36 requires thatthe price is to be determined on the basis of valuation by a registered valuer in accordance with the prescribed rules.

Question 15.
As a part of amalgamation, Harsha Limited acquired 90% of the issued capital of Ananya Limited. The issued, subscribed and paid up capital of Ananya Limited is ₹ 100 Crores. Out of remaining minority shareholding of Ananya Limited, ₹ 8 Crores are held by Mr. Raju. Mr. Raju was not satisfied with the amount decided under the scheme and therefore negotiated for a higher price.

As a result, he received an extra amount of ₹ 10 Lacs. The other minority shareholders claim that Mr. Raju is not entitled to the entire extra amount of ₹ 10 Lacs. Examine the validity of claim made by other minority shareholders under the relevant provisions of the Companies Act, 2013. [Nov. 20 – New Syllabus (4 Marks)]
Answer:
Sharing of additional compensation:

As per Sec. 236(8) of Companies Act, 2013, where the shares of minority shareholders have been acquired in pursuance of this section, and as on or prior to the date of transfer following such acquisition, the shareholders holding 75% or more minority equity shareholding negotiate or reach an understanding on a higher price for any transfer, proposed or agreed upon, of the shares held by them without disclosing the fact or likelihood of transfer taking place on the basis of such negotiation, understanding or agreement, the majority shareholders shall share the additional compensation so received by them with such minority shareholders on a pro rata basis.

In the present case, Harsha Limited acquired 90% of the issued capital of Ananya Limited. The issued, subscribed and paid up capital of Ananya Limited is ₹ 100 Crores. Out of remaining minority shareholding of Ananya Limited, ₹ 8 Crores are held by Mr. Raju.

Mr. Raju was not satisfied with the amount decided under the scheme and therefore negotiated for a higher price. As a result, he received an extra amount of 110 Lacs. The other minority shareholders claim that Mr. Raju is not entitled to the entire extra amount of ₹ 10 Lacs.
Conclusion: Considering the provisions of Sec. 236(8), claim made by other minority shareholders seems valid.

Question 16.
Cotton Yarn Ltd., and Country Cotton Blossom Ltd., are two listed companies engaged in the Business of Textiles. The companies are not making profits and as such their share’s market price have gone down. A substantial portion of their share capital is held by Central Government as well as some Public Financial Corporations.

In order to increase the share value, the Central Government wants to amalgamate the aforesaid two companies into a single company. Examine the powers of Central Government to amalgamate the two companies in public interest as per the provisions of the Companies Act, 2013. [RTP-Nov. 18]
Answer:
Power of C.G. to provide for amalgamation of companies in public interest:

As per Sec. 237 of the Companies Act, 2013, where the Central Government is satisfied that it is essential in the public interest that two or more companies should amalgamate, the Central Government, may, by order notified in the official gazette, provide for the amalgamation of those companies into a single company with such constitution, with such property, powers, rights, interests, authorities and privileges and with such liabilities, duties and obligations, as may be specified in the order.

The order may also provide for the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company and such consequential, incidental and supplemental provisions as may, in the opinion of the Central Government, be necessary to give effect to amalgamation.

Every member or creditor including a debenture holder of each of the transferor companies before the amalgamation shall have, as nearly as may be,

the same interest in or rights against the transferee company as he had in the company of which he was originally a member or creditor and

in case the interest or rights of such member or creditor in or against the transferee company are less than the interest in or rights against the original company, he shall be entitled to compensation to that extent, which shall be assessed by such authority as may be prescribed and every such assessment shall be published in the official gazette and the compensation so assessed shall be paid to the member or creditor concerned by the transferee company.

Question 17.
CPR Ltd. and TJC Ltd. are wholly owned by Government of Tamil Nadu. As a policy matter, the Gov-ernment issued administrative orders for merging TJC Ltd. with CPR Ltd. in the public interest. State the authority with whom the application for merger is required to be filed under the provisions of the Companies Act, 2013. Also state the provisions governing the preservation of books and records of TJC Ltd. after merger under the said Act. [May 18 – New Syllabus (3 Marks)]
Answer:
Powers of C.G. to provide for amalgamation of companies in public interest:

Sec. 237(1) of Companies Act, 2013, provides that where the C.G. is satisfied that it is essential in the public interest that two or more companies should amalgamate, it may, by order notified in the Official Gazette, provide for the amalgamation of those companies into a single company with such constitution, with such property, powers, rights, interests, authorities and privileges, and with such liabilities, duties and obligations, as may be specified in the order.

In the present case, CPR Ltd. and TJC Ltd. are wholly owned by Government of Tamil Nadu. As a policy matter, the Government issued administrative orders for merging TJC Ltd. with CPR Ltd. in the public interest.

Conclusion: Application for merger is required to be filed with Central Government and it may, by order notified in the Official Gazette, provide for the amalgamation of these companies.

Provisions governing preservation of books and records after merger:
Sec. 239 of Companies Act, 2013 provides the provisions w.r.t. preservation of books and papers of amalgamated companies. Accordingly, the books and papers of a company which has been amalgamated with, or whose shares have been acquired by, another company under this Chapter shall not be disposed of without the prior permission of the C.G. and

before granting such permission, that Government may appoint a person to examine the books and papers or any of them for the purpose of ascertaining whether they contain any evidence of the commission of an offence in connection with the promotion or formation, or the management of the affairs, of the transferor company or its amalgamation or the acquisition of its shares.

Inspection, Inquiry and Investigation – CA Final Law Study Material is designed strictly as per the latest syllabus and exam pattern.

Inspection, Inquiry and Investigation – CA Final Law Study Material

Question 1.
A notice was sent to Mr. Left by the registrar to furnish the information related to a business transacted during his tenure in the X company. Mr. Left ignored the notice considering that he is no more an employee of X company. Registrar issued the summon against Mr. Left. Explain in the light of the Companies Act, 2013 about the liability of the Mr. Left in the given case. [RTP-May 16]
Answer:
Duty of Past officers of the Company:

Section 206(1) of the Companies Act, 2013 provides that where on a scrutiny of any document filed by a company or on any information received by him, the Registrar is of the opinion that any further information or explanation or any further documents relating to the company is necessary, he may by a written notice require the company:
(a) to furnish in writing such information or explanation; or
(b) to produce such documents,
within such reasonable time, as may be specified in the notice.

Section 206(2) of the Companies Act, 2013 provides that on the receipt of a notice u/s 206(1), it shall be the duty of the company and of its officers concerned to furnish such information or explanation to the best of their knowledge and power and to produce the documents to the Registrar within the time specified or extended by the Registrar.

Proviso to Sec. 206(2) provides that where such information or explanation relates to any past period, the officers who had been in the employment of the company for such period, if so called upon by the Registrar through a notice served on them in writing, shall also furnish such information or explanation to the best of their knowledge.

In the present case, a notice was sent to Mr. Left by the registrar to furnish the information related to a business transacted during his tenure in the X company. Mr. Left ignored the notice considering that he is no more an employee of X company. Registrar issued the summon against Mr. Left.
Conclusion: Considering the provisions of Sec. 206(2), Mr, Left is liable to provide such information.

Question 2.
A group of shareholders of M/s. FMG Limited made a complaint to the concerned Registrar of Companies (RoC) that the business of the Company is being carried on for unlawful and fraudulent purposes and filed an application to enquire into the affairs of the Company. Referring to and analyzing the provisions of the Companies Act,-2013, decide:
(i) Whether the RoC has the power to order for an inquiry into the affairs of the Company?
(ii) If yes, state the procedure to be followed by the RoC.
(iii) Whether the inquiry should be pursued by the RoC in case the complaint is withdrawn by the same group of shareholders subsequent to the Order for enquiry?
(iv) Whether the Central Government has the power to direct the RoC to carry out the inquiry? [Nov. 19 – New Syllabus (4 Marks)]
Answer:
Inquiry by the Registrar:
As per Sec. 206(4) of Companies Act, 2013, if the Registrar is satisfied on the basis of information available with or furnished to him or on a representation made to him by any person that:

the business of a company is being carried on for a fraudulent or unlawful purpose or not in compliance with the provisions of this Act, or

the grievances of investors are not being addressed, the Registrar may by a written order, call on the company to furnish in writing any information or explanation on matters specified in the order within such time as he may specify therein and carry out such inquiry as he deems fit after providing the company a reasonable opportunity of being heard.

Before passing such an order, the Registrar has to inform the company of the allegations made against it.

Conclusion: Based on the provisions of Sec. 206(4), following conclusions may be drawn:

(i) Roc has power to order for an inquiry into the affairs of the company.

(ii) Procedure to be followed by Roc is covered by Sec. 206(4) and stated above.

(iii) There is no specific provision in the law as to the situation if the complaint is withdrawn by the same group of shareholders subsequent to the Order for enquiry. However, it seems reasonable that once an order for conduct of inquiry is passed, the inquiry should be completed even where the complaint is withdrawn.

(iv) The C.G. may, if it is satisfied that the circumstances so warrant, direct the Registrar or an inspector appointed by it for the purpose to carry out the inquiry u/s 206(4).

Question 3.
The Registrar, after inspection of the books of account of the PQR Ltd., submitted its report with further recommendation of investigation into the affairs of the company. Explain the law as to the recommendation for further investigation by the registrar. [MTP-Oct.18]
Answer:
Report on Inspection made:

Sec. 208 of Companies Act, 2013 provides that the Registrar or inspector shall, after the inspection of the books of account or an inquiry u/s 206 and other books and papers of the company u/s 207, submit a report in writing to the Central Government (delegated to Regional Director) along with such documents, if any.

Such report may, if necessary, include a recommendation that further investigation into the affairs of the company is necessary giving his reasons in support.

Question 4.
A group of creditors of Mac Trading Limited makes a complaint to the Registrar of Companies, Hyderabad alleging that the management of the company is indulging in destruction and falsification of the accounting records of the company. The complainants request the Registrar to take immediate steps to seize the records of the company so that the management may not be allowed to tamper with the records. The complaint was received at 11 A.M. on 6th June, 2020 and the ROC entered the premises at 11.30 A.M. for the search.
Examine the powers of the Registrar to seize the books of the company. [May 16 (4 Marks)]
Or
A group of creditors of XYZ Limited makes a complaint to the Registrar of Companies, Gujarat alleging that the management of the company is indulging in destruction and falsification of the accounting records of the company.

The complainants request the Registrar to take immediate steps to seize the records of the company so that the management may not be allowed to tamper with the records. The complaint was received at 11 A.M. on 06th June, 2020 and the registrar has attempted to enter the premise of company but has been denied by the company, due to not having order from special court.

Is the contention of company being valid in terms of Companies Act, 2013? [RTP – Nov. 18]
Answer:
Circumstances for seizure:
Section 209(1) of the Companies Act, 2013 provides that where, upon information in his possession or otherwise, the Registrar or Inspector has reasonable ground to believe that the books and papers of

• a company, or
• relating to the key managerial personnel or any director or auditor or company secretary in practice if the company has not appointed a company secretary,

are likely to be destroyed, mutilated, altered, falsified or secreted, he may, after obtaining an order from the Special Court for the seizure of such books and papers,
(a) enter, with such assistance as may be required, and search, the place or places where such books or papers are kept; and
(b) seize such books and papers as he considers necessary after allowing the company to take copies of, or extracts from, such books or papers at its cost.

In the present case, a group of creditors makes a complaint to the Registrar of Companies alleging that the management of the company is indulging in destruction and falsification of the accounting records of the company. The complainants request the Registrar to take immediate steps to seize the records of the company so that the management may not be allowed to tamper with the records. The complaint was received at 11 A.M. on 06th June, 2020 and the registrar has attempted to enter the premise of company but has been denied by the company, due to not having order from special court.

Conclusion: In the given scenario, the registrar has failed to obtain permission from the special court so, he is not authorized to enter the premises of the company and seize the books of account. Hence, the contention of the company is valid in law.

Question 5.
Shareholders of Hide and Seek Ltd. are not satisfied about performance of the company. It is suspected that some activities being run in the name of the company are not in the interest of the company or its members. 101 out of total 500 shareholders of the company have made an application to the Central Government to appoint an inspector to carry out investigation and find out the true picture.
With reference to the provisions of the Companies Act, 2013, mention whether the shareholders’ application will be accepted? Elaborate. [Nov. 15 (4 Marks)]
Or
Shareholders of Akash Ltd. not satisfied with the performance of the company inferred that some activities conducted by the company are against the interest of the members of the company. Group of shareholders of the company filed an application to the Central Government to appoint an inspector to carry out investigation to look into the matter.
With reference to the provisions of the Companies Act, 2013, mention whether the shareholders’ application is tenable? Elaborate.
Answer:
Circumstances when Investigation may be ordered by C.G.

Sec. 210(1) of the Companies Act, 2013 provides that where the C.G. is of the opinion, that it is necessary to investigate into the affairs of a company,

• on the receipt of a report of the Registrar or Inspector u/s 208;
• on intimation of a special resolution passed by a company that the affairs of the company ought to be investigated; or
• in public interest,

it may order an investigation into the affairs of the company.

In the present case, Shareholders of Hide and Seek Ltd. are not satisfied about performance of the company. It is suspected that some activities being run in the name of the company are not in the interest of the company or its members. 101 out of total 500 shareholders of the company have made an application to the C.G. to appoint an inspector to carry out investigation and find out the true picture.

Conclusion: Considering the provisions of Sec. 210(1), application will not be accepted as special resolution not passed. Alternatively, in public interest, C.G. has discretion to order for the investigation.

Question 6.
A majority of the Board of directors of M/s High Value InfoTech Ltd. have realized that some of the business activities carried out in the name of the company is not in the interest of either the company or its members. They want that the company should make an application to the C.G. to appoint an Inspector to carry out investigation and find out the whole truth. Explain the steps that should be taken to achieve the purpose.
Answer:
Circumstances when Investigation may be ordered by C.G.

Sec. 210(1) of the Companies Act, 2013 provides that where the C.G. is of the opinion, that it is necessary to investigate into the affairs of a company,-

• on the receipt of a report of the Registrar or Inspector u/s 208;
• on intimation of a special resolution passed by a company that the affairs of the company ought to be investigated; or
• in public interest,

it may order an investigation into the affairs of the company.

In the instant case, majority of the directors have realized that some of the business activities carried out in the name of the company is not in the interest of either the company or its members. They want that the company should make an application to the C.G. to appoint an Inspector to carry out investigation and find out the whole truth.

Conclusion: Considering the provisions of Sec. 210(1), special resolution need to be passed and application to be made to C.G.

Question 7.
The shareholders of SKM Limited are not satisfied with the performance of the company. Some of the activities carried on by the company are not in the interest of the company and its members. The total number of shareholders as per the Register of Members as on 31.3.2021 was 2,000 and 450 members holding 16% of the paid-up value of the shares have made an application jointly to the Central Government to appoint an Inspector to carry out the investigation and find out the true picture.

With reference to the provisions of the Companies Act, 2013, mention whether the application will be accepted? Elaborate. After the filing of the application about 100 members holding about 7% of the paid-up capital had withdrawn. Decide whether the application is maintainable or not. [Nov. 20 – Old Syllabus (4 Marks)]
Answer:
Circumstances when Investigation may be ordered by C.G.

Sec. 210(1) of the Companies Act, 2013 provides that where the C.G. is of the opinion, that it is necessary to investigate into the affairs of a company,

• on the receipt of a report of the Registrar or Inspector u/s 208;
• on intimation of a special resolution passed by a company that the affairs of the company ought to be investigated; or
• in public interest,

it may order an investigation into the affairs of the company.

In the present case, Shareholders of SKM Ltd. are not satisfied about performance of the company. It is suspected that some activities carried on by the company are not in the interest of the company and its members. 450 out of total 2000 members of the company have made an application to the C.G. to appoint an inspector to carry out investigation and find out the true picture.

Conclusion: Considering the provisions of Sec. 210(1), application will not be accepted as special resolution not passed. Alternatively, in public interest, C.G. has discretion to order for the investigation.

Subsequent withdrawal of applicant from the application has no consequences, as application was not maintainable from the very beginning as special resolution not passed.

Question 8.
Explain the provisions of the Companies Act, 2013 relating to the establishment of Serious Fraud Investigation Office by the Central Government. State its composition.
Answer:
Establishment of Serious Fraud Investigation Office (SFIO) (Sec. 211)

Sec. 211(1) of Companies Act, 2013 provides that the C.G. shall, by notification, establish an office to be called the SFIO to investigate frauds relating to a company.

Sec. 211 (2) of Companies Act, 2013 provides that SFIO shall be headed by a Director, and Consist of such number of experts from the following fields to be appointed by the C.G. from amongst persons of ability, integrity and experience in,-

1. banking;
2. corporate affairs;
3. taxation;
4. forensic audit;
5. capital market;
6. information technology;
7. law; or
8. such other fields as may be prescribed.

Sec. 211(3) provides that the C.G. shall, by notification, appoint a Director in the SFIO, who shall be an officer not below the rank of a Joint Secretary to the Government of India having knowledge and experience in dealing with matters relating to corporate affairs.

Sec. 211(4) of Companies Act, 2013 provides that the C.G. may appoint such experts and other officers and employees in the SFIO as it considers necessary for the efficient discharge of its functions under this Act.

Question 9.
What are the grounds on which the investigation is assigned to Serious Fraud Investigation Office?
Answer:
Grounds on which investigation may be assigned to SFIO:
Sec. 212(1) of Companies Act, 2013 provides that without prejudice to the provisions of Sec. 210, where the C.G. is of the opinion that it is necessary to investigate into the affairs of a company by the SFIO –
(a) on receipt of a report of the Registrar or inspector u/s 208;
(b) on intimation of a special resolution passed by a company that its affairs are required to be investigated;
(c) in the public interest; or
(d) on request from any Department of the Central Government or a State Government, it may, by order, assign the investigation into the affairs of the said company to the SFIO.

Question 10.
Mrs. Preeti, a lady aged about 32 years and Managing Director of M/s Grow more plantations Ltd., has been arrested for an offence covered under section 447 of the Companies Act, 2013 on a complaint made by the Director, Serious Fraud Investigation Officer. Mrs. Preeti seeks your legal advise as to the conditions under which she can be released on bail and the role of Special Court in this regard. [Nov. 17 (4 Marks)]
Answer:
Conditions for release on bail in case of offences covered u/s 447:

Sec. 212(6) of Companies Act, 2013 provides that offences covered u/s 447 of this Act shall be cognizable and no person accused of any such offence shall be released on bail or on his own bond unless—
(a) the Public Prosecutor has been given an opportunity to oppose the application for such release; and
(b) where the Public Prosecutor opposes the application, the court is satisfied that there are reasonable grounds for believing that he is not guilty of such offence and that he is not likely to commit any offence while on bail.

However, a person, who, is under the age of 16 years or is a woman or is sick or infirm, may be released on bail, if the Special Court so directs.

The Special Court shall not take cognizance of any offence referred in this sub-section except upon a complaint in writing made by—
(a) the Director, SFIO; or
(b) any officer of the C.G. authorised, by a general or special order in writing in this behalf by t that Government.

In the present case, Mrs. Preeti has been arrested for an offence covered u/s 447 of the Act on a complaint made by the Director, SFIO.

Conclusion: Considering the provisions of Sec. 211(6), Mrs. Preeti may be released on bail if the Special Court so directs.

Question 11.
Answer the following:
(i) The shareholders of Kumar Ltd. passed a special resolution that the affairs of the company ought to be investigated. The company submitted the special resolution to the Central Government. Examine, explaining the relevant provisions of the Companies Act, 2013, whether the power of the Central Government to order an investigation is mandatory or discretionary?
(ii) Enumerate the procedures to be followed by the Serious Fraud Investigation Office to arrest a person who has been found guilty ofan offence committed under section 447 of the Companies Act, 2013. [Nov. 18-New Syllabus (7 Marks)]
Answer:
(i) Powers of Central Government to order an investigation:
Section 210(1) of the Companies Act, 2013 provides that where the Central Government is of the opinion, that it is necessary to investigate into the affairs of a company,
(a) on the receipt of a report of the Registrar or Inspector u/s 208;
(b) on intimation of a special resolution passed by a company that the affairs of the company ought to be investigated; or
(c) in public interest,
it may order an investigation into the affairs of the company.

Conclusion: Use of the term ‘may’ make it clear that the power of the Central Government to order an investigation is discretionary.

(ii) Procedure to be followed by Serious Fraud Investigation Office (SFIO) for arrest of a person:
Section 212(8), (9) & (10) of Companies Act, 2013 read with the Companies (Arrests in connection with Investigation by Serious Fraud Investigation Office) Rules, 2017 provides the provisions relating to procedure to be followed for arrest of a person who has been guilty of any offence punishable u/s 212 of the Act.

Sec. 212(8): If any officer not below the rank of Assistant Director of SFIO authorised in this behalf by the C.G. by general or special order, has on the basis of material in his possession reason to believe (the reason for such belief to be recorded in writing) that any person has been guilty of any offence punishable under sections referred to in Sec. 212(6), he may arrest such person and shall, as soon as may be, inform him of the grounds for such arrest.

Sec. 212(9): The officer authorised u/s 212(8) shall, immediately after arrest of such person, forward a copy of the order, along with the material in his possession, to the SFIO in a sealed envelope, in prescribed. SFIO shall keep such order and material for such period as may be prescribed.

Sec. 212(10): Every person so shall within 24 hours, be taken to a Special Court or Judicial Magistrate or a Metropolitan Magistrate, as the case may be, having jurisdiction. The period twenty four hours shall exclude the time necessary for the journey from the place of arrest to the Magistrate’s court.

Question 12.
Some creditors of NTY Limited approached you to guide them to apply to the Tribunal for seeking an order for conducting an investigation into the affairs of the company due to the fact that the business of the company is being conducted with intention to defraud its creditors. Referring to the provisions of the Companies Act, 2013, guide them regarding the circumstances under which and how a person, not being a member of the company can apply to the Tribunal to seek an order for conducting an investigation into the affairs of a company. [May 18 – Old Syllabus (4 Marks), RTP – Nov. 18]
Answer:
Circumstances in which Tribunal may pass order
Clause (b) of Sec. 213 of Companies Act, 2013 provides that Tribunal on filing of an application by person (not being a member of the company or otherwise) if it is satisfied that there are circumstances suggesting that-

(i) the business of the company is being conducted with intent to defraud its creditors, members or any other person or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive to any of its members or that the company was formed for any fraudulent or unlawful purpose;

(ii) persons concerned in the formation of the company or the management of its affairs have in connection there with been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members; or

(iii) the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director, or the manager, of the company,

may pass order, after giving a reasonable opportunity of being heard to the parties concerned, that the affairs of the company ought to be investigated by an inspector or inspectors appointed by the Central Government and where such an order is passed, the Central Government shall appoint one or more competent persons as inspectors to investigate into the affairs of the company in respect of such matters and to report thereupon to it in such manner as the Central Government may direct.
Conclusion : Creditors should be guided in terms of provisions stated above.

Question 13.
The business of Weak Fabrication Limited is conducted fraudulently and the management activities are not in the interests of the company. The paid-up capital of the company is one crore rupees. A group of shareholders numbering 110 members representing 1 /9 of total voting power decided to approach Tribunal (NCLT) to carryout investigation into the company’s affairs under the provisions of the Companies Act, 2013. They seek your advice in the following matters, stating the relevant provisions of the companies Act, 2013.
1. Whether the group can make valid application?
2. Other than member, can any other person make application?
3. Are the applicants required to furnish security for payment of cost and expenses of investigation? [May 18 – New Syllabus (7 Marks)]
Answer:
Investigation into company affairs:
Sec. 213 of the Companies Act, 2013 provides that the Tribunal on an application made by:
(i) not less than 100 members or members holding not less than 1/10th of the total voting power, in the case of a company having a share capital;
or
(ii) not less than 1 /5th of the persons on the company’s register of members, in the case of a company having no share capital,

and supported by such evidence as may be necessary for the purpose of showing that the applicants have good reasons for seeking an order for conducting an investigation into the affairs of the company, may order that the affairs of the company ought to be investigated by an inspector or inspectors appointed by the Central Government.
Further, order for investigation may also be passed by Tribunal if on an application made to it by any other person or otherwise, it is satisfied that there are circumstances suggesting that—

(i) the business of the company is being conducted with intent to defraud its creditors, members or any other person or otherwise for a fraudulent or unlawful purpose,’or in a manner oppressive to any of its members or that the company was formed for any fraudulent or unlawful purpose;

(ii) persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members; or

(iii) the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director, or the manager, of the company.

Accordingly,

1. Group as stated in the question can make valid application as the group consists of more than 100 members.
2. Persons other than Shareholders can also make application as per the circumstances mentioned above.
3. Applicants are required to furnish security as per the provisions of Sec. 214 which states that C.G. may before appointing an inspector u/s 213, require the applicant to give such security not exceeding ₹ 25,000 as may be prescribed, for payment of the costs and expenses of the investigation.

Protection of employees during investigation (Sec. 210)

Question 14.
Mr. Atul is an employee of the company ABC Limited and investigation is going on him under the provisions of Companies Act, 2013. The company wants to terminate the employee on the ground of investigation is going against him. They have filed the application to tribunal for approval of termination. Company has not received any reply from the tribunal within 30 days of filling an application. The company consider it as a deemed approval and terminated Mr: Atul.
(a) Is the contention of company being valid in law?
(b) What is remedy available to Mr. Atul?
(c) What is remedy available to Mr. Atul, if reply of Tribunal has been received within 30 days of application? [MTP-March 18, March 19]
Answer:
Protection of employees during investigation

Sec. 218(1) of Companies Act, 2013 provides that if during the course of any investigation of the affairs of a company, such company proposes:

1. to discharge or suspend any employee; or
2. to punish him, whether by dismissal, removal, reduction in rank or otherwise; or
3. to change the terms of employment to his disadvantage,

the company shall obtain approval of the Tribunal of the action proposed against the employee and if the Tribunal has any objection to the action proposed, it shall send by post notice thereof in writing to the company.

Sec. 218(2) provides that if the company does not receive within 30 days of making of application, the approval of the Tribunal, then and only then, the company may proceed to take against the employee, the action proposed.

As per Sec. 218(3) and 218(4) if the company or person concerned is dissatisfied with the objection raised by the Tribunal, it may, within a period of 30 days of the receipt of the notice of the objection, prefer an appeal to the Appellate Tribunal in such manner and on payment of such fees as may be prescribed. The decision of the Appellate Tribunal on such appeal shall be final and binding on the Tribunal and on the company, other body corporate or person concerned.

In the present case, Mr. Atul is an employee of the company ABC Limited and investigation is going on him under the provisions of Companies Act, 2013. The company wants to terminate the employee on the ground of investigation is going against him. They have filed the application to tribunal for approval of termination. Company has not received any reply from the tribunal within 30 days of filling an application. The company consider it as a deemed approval and terminated Mr. Atul.

Conclusion: Applying the provisions of Sec. 218, following conclusions may be drawn:

(a) Contention of company is valid in law and company can consider it as deemed approval.
(b) Mr. Atul has no remedy because appeal can be made to appellate tribunal only if the person is dissatisfied with the objection raised by the appellate tribunal. But in the given case, there is no reply from appellate tribunal.
(c) Atul may prefer an appeal to the Appellate Tribunal within a period of 30 days of the receipt of the notice of the objection, in such manner and on payment of such fees as may be prescribed.

Question 15.
Damage Ltd, the Company wanted to suspend Mr. Z, the CFO of the Company during the pendency of an investigation being conducted under the provisions of the Companies Act, 2013 on the order of Tribunal. The Company approached the Tribunal on 3rd January, 2021 for the proposed action. The Company on 15th February, 2021 passed an order of suspension without waiting for the orders from Tribunal. Comment upon the action taken by the Company with reference to the relevant provisions of the Act. [May 17 (4 Marks)]
Answer:
Non-receipt of approval from Tribunal

Sec. 218(1) of Companies Act, 2013 provides that if during the course of any investigation of the affairs of a company, such company proposes:

1. to discharge or suspend any employee; or
2. to punish him, whether by dismissal, removal, reduction in rank or otherwise; or
3. to change the terms of employment to his disadvantage,

the company shall obtain approval of the Tribunal of the action proposed against the employee and if the Tribunal has any objection to the action proposed, it shall send by post notice thereof in writing to the company.

Sec. 218(2) provides that if the company does not receive within 30 days of making of application, the approval of the Tribunal, then and only then, the company may proceed to take against the employee, the action proposed.

In the present case, company wanted to suspend Mr. Z, the CFO of the Company during the pendency of an investigation being conducted under the provisions of the Companies Act, 2013 on the order of Tribunal. The Company approached the Tribunal on 3rd January, 2021 for the proposed action. The Company on 15th February, 2021 passed an order of suspension without waiting for the orders from Tribunal.

Conclusion: Considering the above provision, Action taken by company is valid as suspension takes
place after 30 days.

Question 16.
‘ Pursuant to Section 210 of the Companies Act, 2013 an Inspector was appointed to investigate the affairs of Sterling Trading Limited. Mr. Ahmed the General Manager (Operations) who is aware of certain misdeeds of the management, desires to know whether he is entitled to any protection against dismissal by the company if he discloses the misdeeds during the course of examination by the inspector. Advise him explaining the relevant provisions of the Companies Act, 2013. [Nov. 17 (3 Marks)]
Answer:
Protection of employees during investigation:

Sec. 218(1) of Companies Act, 2013 provides that if during the course of any investigation of the affairs of a company, such company proposes:

1. to discharge or suspend any employee; or
2. to punish him, whether by dismissal, removal, reduction in rank or otherwise; or
3. to change the terms of employment to his disadvantage,

the company shall obtain approval of the Tribunal of the action proposed against the employee and if the Tribunal has any objection to the action proposed, it shall send by post notice thereof in writing to the company.

Sec. 218(2) provides that if the company does not receive within 30 days of making of application, the approval of the Tribunal, then and only then, the company may proceed to take against the employee, the action proposed.
Conclusion: Mr. Ahmed has the protection available u/s 218 of Companies Act, 2013.

Question 17.
Discuss the powers of Inspectors regarding investigation into affairs of related companies.
Or
What are the circumstances in which an inspector appointed under section 210 of the Companies Act, 2013, can investigate into affairs of related companies also?
Answer:
Power of inspector to conduct investigation into affairs of related companies, etc.
As per Sec. 219 of Companies Act, 2013, if an inspector appointed under section 210 or 212 or 213 to investigate into the affairs of a company considers it necessary for the purposes of the investigation, shall also investigate the affairs of—

(a) any other body corporate which is, or has at any relevant time been the company’s subsidiary company or holding company, or a subsidiary company of its holding company;

(b) any other body corporate which is, or has at any relevant time been managed by any person as managing director or as manager, who is, or was, at the relevant time, the managing director or the manager of the company;

(c) any other body corporate whose Board of Directors comprises nominees of the company or is accustomed to act in accordance with the directions or instructions of the company or any of its directors; or

(d) any person who is or has at any relevant time been the company’s managing director or manager or employee.
Such Investigation is allowed only with prior approval of the Central Government.

Question 18.
During investigations conducted on the affairs of a company in the public interest, the inspector observed that the Directors of the company had been acting on the instructions of the holding company and he proceeded to investigate the holding company Is Inspector permitted to do under the provisions of the Companies Act, 2013? [May 17 (4 Marks)]
Or
Members of Sarat Solutions Ltd. are concerned about the performance of the company as they suspect gross negligence and mismanagement of the affairs of the company that may be detrimental to the interests of the company and therefore filed an application to the Central Government to appoint an inspector to carry oil the investigation. Mr. X, who was appointed as inspector, is of the view that to Find out the true picture it is necessary to investigate into the affairs of M/s.

Hemant Softech Solutions Ltd., which is a subsidiary of Sarat Solutions Ltd. Referring to and analysing the provisions of the Companies Act, 2013 decide, whether the inspector has powers to investigate into of M/s. Hemant Softech Solutions Ltd. [May 19 – Old Syllabus (4 Marks)]
Answer:
Power of inspector to conduct investigation into affairs of related companies, etc.
As per Sec. 219 of Companies Act, 2013, if an inspector appointed under section 210 or 212 or 213 to investigate into the affairs of a company considers it necessary for the purposes of the investigation, shall also investigate the affairs of-

(a) any other body corporate which is, or has at any relevant time been the company’s subsidiary company or holding company, or a subsidiary company of its holding company;

(b) any other body corporate which is, or has at any relevant time been managed by any person as managing director or as manager, who is, or was, at the relevant time, the managing director or the manager of the company;

(c) any other body corporate whose Board of Directors comprises nominees of the company or is accustomed to act in accordance with the directions or instructions of the company or any of its directors; or

(d) any person who is or has at any relevant time been the company’s managing director or manager or employee.
Such Investigation is allowed only with prior approval of the Central Government.

Freezing of assets of company on inquiry and investigation (See. 221)

Question 19.
The members of company with no paid-up share capital, filed a complaint against change in the management of the company due to which it was likely that the affairs of the company will be conducted in a manner that it will be prejudicial to the interest of its 25 members. Total number of members of company were 100. On inquiry and investigation on the complaint, having a reasonable ground to believe that the transfer or disposal of assets of the company may be against to the interests of its shareholders. The Tribunal passed an order that such transferor disposal of assets shall not be made during one year of such order.

Evaluate on the basis of the given facts, the following situations according to the Companies Act, 2013:
(a) Eligibility of the members to file a complaint.
(b) Where if the management dispose of the certain assets in contravention to the order of the Tribunal. [MTP-March 18]
Answer:
Freezing of assets of the company on inquiry and investigation:
(a) Eligibility of members to file a complaint:

As per Sec. 244(1), in the case of a company not having a share capital, atleast 1/5th of the total number of its members have the right to apply u/s 221.

Where any members of a company are entitled to make an application u/s 244(1), any one or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of them.

In the instant case, requirement of minimum numbers of members is fulfilled i.e. it is more than 1/5th of the total number of its members of the company (1/5 × 100 = 20).

Conclusion: Members are eligible to file a complaint. Provided that the Tribunal may, on an application made to it in this behalf, waive all or any of the above requirements as to enable the members to apply u/s 241.

(b) Penalty provisions:

As per Sec. 221(1) of the Companies Act, 2013, if it appears to the Tribunal, on a complaint made by members as specified u/s 244(1) that the removal, transfer or disposal of funds, assets, properties of the company is likely to take place in a manner that is prejudicial to the interests of its members, Tribunal ordered that such transfer, removal or disposal shall n’ot take place during such period not exceeding 3 years as may be specified in the order or may take place subject to such conditions and restrictions as the Tribunal may deem fit.

Sec. 221(2) provides that in case of removal, transfer or disposal of funds, assets or properties ‘of the company in contravention of the order of Tribunal u/s 221(1), the company shall be punishable with fine which shall not be less than ₹ 1 lakh but which may extend to ₹ 25 lakh and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 3 years or with fine which shall not be less than ₹ 50,000 but which may extend to ₹ 5 lakh, or with both.

Question 20.
XYZ Ltd. proposed for amalgamation with the PQR Ltd. The issued and paid up capital of XYZ Ltd. is ₹ 5 crore consisting of 5,00,000 equity shares of ₹ 100 each. The said company has 500 members. It was believed by certain members of the company that the proposed Scheme of amalgamation resulting into the transfer and disposal of funds and assets of the company to the transferee, will be effecting their interest. So, 80 members holding 10,000 equity shares of the company decided to file an application for relief before the Tribunal.

Examine the given situation in the light of the Companies Act, 2013 –
(i) Whether the said petition will be maintainable.
(ii) In case where it appears to the Tribunal, that such proposal is likely to effect the interest of the members, remedy available to the aggrieved members. [MTP-Aug. 18]
Answer:
Right to apply u/s 241 for oppression and mismanagement:

• As per Section 244 of the Companies Act, 2013, in the case of a company having share capital, members eligible to apply for oppression and mismanagement shall be lowest of the following:
• 100 members; or
• 1/10th of the total number of members; or
• Members holding not less than 1/10th of the issued share capital of the company.

The shareholding pattern of MNC Limited consists of ₹ 5,00,00,000 equity share capital held by 500 members. The petition shall be valid if it has been made by the lowest of the following:

• 100 members; or
• 50 members (being 1/10th of 500); or
• Members holding 7 50,00,000 share capital (being 1/10th of ₹ 5,00,00,000)

The petition alleging oppression and mismanagement has been made by some members as follows:

• No. of members making the petition – 80
• Amount of share capital held by members making the petition – ₹ 10,00,000

Conclusion: Petition made by 80 members meets the eligibility criteria specified under section 244 of the Companies Act, 2013 as it exceeds the minimum requirement of 50 members in this case. Therefore, the petition is maintainable.

(ii) Remedy available to aggrieved members:

As per Sec. 2 21 (1) of the Companies Act, 2 013, if it appears to the Tribunal, on a complaint made by members as specified u/s 244(1) that the removal, transfer or disposal of funds, assets, properties of the company is likely to take place in a manner that is prejudicial to the interests of its members, Tribunal ordered that such transfer, removal or disposal shall not take place during such period not exceeding 3 years as may be specified in the order or may take place subject to such conditions and restrictions as the Tribunal may deem fit.

Sec. 2 21 (2) provides that in case of removal, transfer or disposal of funds, assets or properties of the company in contravention of the order of Tribunal u/s 221(1), the company shall be punishable with fine which shall not be less than ₹ 1 lakh but which may extend to ₹ 25 lakh and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 3 years or with fine which shall not be less than ₹ 50,000 but which may extend to ₹ 5 lakh, or with both.

Question 21.
Remedial Pharma Limited, over the years, enjoys a high reputation in the market and its general reserves are ten times more than the paid-up capital of the company. There is a serious apprehension of cornering the share of the company by a group of unscrupulous persons likely to result in change in the Board of Directors which may be prejudicial to the public interest. The company seeks your advice as to how it can block the transfer of shares of the company under the provisions of the Companies Act, 2013. [Nov. 17 (4 Marks)]
Answer:
Imposition of restrictions upon securities:

Sec. 222(1) of Companies Act, 2013 provides where it appears to the Tribunal, in connection with any investigation u/s 216 or on a complaint made by any person in this behalf, that there is good reason to find out the relevant facts about any securities issued or to be issued by a company and the Tribunal is of the opinion that such facts cannot be found out unless certain restrictions, as it may deem fit, are imposed the Tribunal may, by order, direct that the securities shall be subject to such restrictions as it may deem fit for such period not exceeding three as may be specified in the order.

In the present case, there is a serious apprehension of cornering the share of the company by a group of unscrupulous persons likely to result in change in the Board of directors which may be prejudicial to the public interest.

Conclusion: The management of Remedial Pharma Limited may make a complaint to the Tribunal and convince that the transfer of shares in favour of the group of unscrupulous persons would change the composition of the Board of directors of the company which shall be prejudicial to the public interest and if the Tribunal is convinced with the pleas of the company, it may pass an order as stated above which would block the transfer of shares as stated in the question.

Question 22.
The Central Government ordered an investigation under Section 216 of Companies Act, 2013 against M/s Green Wood Limited for determining the true membership of the company. In connection with this investigation a reference was made to the Tribunal. It appears to the Tribunal that there is a good reason to find out the relevant facts about the company and the Tribunal is of the opinion that unless restrictions are imposed on further issue of such equity shares for two years, the purpose cannot be solved.

Referring to the provisions of the Companies Act, 2013 and Rules framed in this regard, answer:
(i) Can the Tribunal put such a restriction on further issue of shares?
(ii) Period for which such a restriction can be imposed by the Tribunal? [Nov. 18-Old Syllabus (4 Marks)]
Answer:
Imposition of restrictions upon securities:

Sec. 222(1) of Companies Act, 2013 provides where it appears to the Tribunal, in connection with any investigation u/s 216 or on a complaint made by any person in this behalf, that there is good reason to find out the relevant facts about any securities issued or to be issued by a company and the Tribunal is of the opinion that such facts cannot be found out unless certain restrictions, as it may deem fit, are imposed the Tribunal may, by order, direct that the securities shall be subject to such restrictions as it may deem fit for such period not exceeding 3 years as may be specified in the order.

in the present case, the Central Government ordered an investigation u/s 216 of Companies Act, 2013 against M/s Green Wood Limited for determining the true membership of the company. In connection with this investigation a reference was made to the Tribunal. It appears to the Tribunal that there is a good reason to find out the relevant facts about the company and the Tribunal is of the opinion that unless restrictions are imposed on further issue of such equity shares for two years, the purpose cannot be solved.
Conclusion: Tribunal may restrict further issue of shares.
Period for which restriction may be imposed: Tribunal for impose the restriction for any period but not exceeding three years.

Question 23.
An investigation was ordered by the Central Government under section 216 of the Companies Act, 2013, against PKR Limited for determining the true membership of the Company. In connection with this investigation, it appears to the Tribunal that there is good reason to find out the relevant facts about 9% Redeemable Cumulative Preference Shares (RCPS) issued by the company on 15.10.2019 and the Tribunal is of the opinion that unless restriction is imposed on further issue of such shares, the purpose cannot be solved.

Accordingly, the Tribunal, by an Order dated 15.08.2020, directed the Company that the further issue of RCPS shall be subject to restrictions for a period of four years. Despite the order of the Tribunal as above, PKR Limited proceeded with further issue of RCPS on 20.08.2020 in order to fund the working capital requirements for its expansion project.

Referring to the provisions of the Companies Act, 2013, examine the following:
(i) Can the Tribunal restrict further issue of RCPS? If yes, then to what period?
(ii) What are the penal provisions in case of contravention to the above order? [Nov. 18-New Syllabus (5 Marks)]
Answer:
Imposition of restrictions upon securities:

Sec. 222(1) of Companies Act, 2013 provides where it appears to the Tribunal, in connection with any investigation u/s 216 or on a complaint made by any person in this behalf, that there is good reason to find out the relevant facts about any securities issued or to be issued by a company and the Tribunal is of the opinion that such facts cannot be found out unless certain restrictions, as it may deem fit, are imposed the Tribunal may, by order, direct that the securities shall be subject to such restrictions as it may deem fit for such period not exceeding 3 years as may be specified in the order.

In the present case, Tribunal, by an Order dated 15.08.2020, directed the Company that the further issue of RCPS shall be subject to restrictions for a period of four years.
Conclusion: Tribunal may restrict further issue of RCPS for any period not exceeding three years.

Penal Provisions in case of contravention of Tribunal Order:

Sec. 222(2) of the Companies Act, 2013 provides that where securities in any company are issued or transferred or acted upon in contravention of an order of the Tribunal u/s 222(1),

• the company shall be punishable with fine which shall not be less than ₹ 1 lakh but which may extend to ₹ 25 lakh and
• every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 6 Months or with fine which shall not be less than ₹ 25,000 but which may extend to ₹ 5 lakh, or with both.

Question 24.
What the duties of the inspector as enumerated in section 223 of the Companies Act, 2013, in relation to his report.
Answer:
Duties of Inspector enumerated in Sec. 223 in relation to Inspector’s Report:
Section 223 dealing with the Inspectors report provide the followings:

1. An inspector appointed under this Chapter may, and if so directed by the C.G. shall, submit interim reports to that Government, and on the conclusion of the investigation, shall submit a final report to the C.G. ’
2. Every report shall be in writing or printed as the C.G. may direct.
3. A copy of the report may be obtained by making an application in this regard to the C.G.
4. The report of any inspector appointed under this Chapter shall be authenticated either:

(a) by the seal of the company whose affairs have been investigated; or
(b) by a certificate of a public officer having the custody of the report, as provided under section 76 of the Indian Evidence Act, 1872, and such report shall be admissible in any legal proceeding as evidence in relation to any matter contained in the report.

Question 25.
M/s Genesis Paper Ltd. has been incurring business losses for past couple of years. The company, therefore, passed a special resolution for voluntary winding up. Meanwhile, complaints were made to the Tribunal and to the Central Government about foul play of the directors of the company, which adversely affected the interests of shareholders of the company as well as the public. In this situation advise whether investigation may be initiated against the company under the provisions of the Companies Act, 2013. [Nov. 17 (4 Marks), RTP-May 18, MTP-Oct. 18]
Answer:
Voluntary winding up of company, etc., not to stop investigation proceedings

Sec. 226 of Companies Act, 2013 provides that an investigation may be initiated notwithstanding, and no such investigation shall be stopped or suspended by reason only of, the fact that:
(a) an application has been made u/s 241 (claiming relief from oppression and mismanagement);
(b) the company has passed a special resolution for voluntary winding up; or
(c) any other proceeding for the winding up of the company is pending before the Tribunal.

In the present case, M/s Genesis Paper Ltd. has been incurring business losses for past couple of years. The company, therefore, passed a special resolution for voluntary winding up. Meanwhile, complaints were made to the Tribunal and to the C.G. about foul play of the directors of the company, which adversely affected the interests of shareholders of the company as well as the public.

Conclusion: Considering the provisions of Sec. 226, investigation may be initiated. It will not be stopped or suspended by the reason of the fact that the company has passed a special resolution for voluntary winding up.

Question 26.
Origin paper Ltd. has been incurring business losses for past couple of years. The company therefore, passes a special resolution for voluntary winding up. Meanwhile, complaints were made to the tribunal and to the Central Government about foul play of the directors of the company, which adversely affected the interests of shareholders of the company as well as public.
(a) In this situation advise whether investigation may be initiated against the company under the provision of the Companies Act, 2013.
(b) Further decide whether application can be made to Tribunal for Relief in the above affairs of
the company once the investigation is initiated against the company. [MTP-April 18, RTP-May 18]
Answer:
(a) Voluntary winding up of company, etc., not to stop investigation proceedings:

Sec. 226 of Companies Act, 2013 provides that an investigation may be initiated notwithstanding, and no such investigation shall be stopped or suspended by reason only of, the fact that:
(a) an application has been made u/s 241 (claiming relief from oppression and mismanagement);
(b) the company has passed a special resolution for voluntary winding up; or
(c) any other proceeding for the winding up of the company is pending before the Tribunal.

In the present case, M/s Genesis Paper Ltd. has been incurring business losses for past couple of years. The company, therefore, passed a special resolution for voluntary winding up. Meanwhile, complaints were made to the Tribunal and to the C.G. about foul play of the directors of the company, which adversely affected the interests of shareholders of the company as well as the public.

Conclusion: Considering the provisions of Sec. 226, investigation may be initiated. It will not be stopped or suspended by the reason of the fact that the company has passed a special resolution for voluntary winding up.

(b) Application to Tribunal for relief in cases of Oppression, etc.
Sec. 241 ofCompanies Act, 2013 provide that any member of a company may apply to the Tribunal if he complains that:

(i) the affairs of the company have been or are being conducted in a manner prejudicial to public interest or in a manner prejudicial or oppressive, to him or any other member or members or in a manner prejudicial to the interests of the company; or

(ii) the material change taken place in the management or control of the company, whether by an alteration in the Board of Directors, or manager, or in the ownership of the company’s shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to its interests or its members or any class of members.

The C.G., if it is of the opinion that the affairs of the company are being conducted in a manner prejudicial to public interest, it may itself apply to the Tribunal for an order.

Where any members of a company are entitled to make an application, any one or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of them.

Conclusion: Considering the provisions of Sections 226 & 241, it can be concluded that though investigation was initiated against the company, it shall not bar members to file an application to Tribunal for Relief u/s 241 of the Companies Act, 2013.

Question 27.
State the provisions relating to professional immunity to legal advisors and bankers under the Companies Act, 2013.
Answer:
Professional immunity to legal advisors and bankers:
Sec. 227 of the Companies Act, 2013 provides that nothing in this Chapter (Sections 206 to 229) shall require the disclosure to the Tribunal or to the C.G. or to the Registrar or to an inspector appointed by the C.G.:

(a) by a legal adviser, of any privileged communication made to him in that capacity, except as respects the name and address of his client; or
(b) by the bankers of any company, body corporate, or other person, of any information as to the affairs of any of their customers, other than such company, body corporate, or person.

Question 28.
Decide the liability of the person for commission of the act during the course of inspection, inquiry or investigation under the Companies Act, 2013:
(i) A person who is required to make statement during the course of investigation pending against its company, is a party to the manipulation of documents related to the transfer of securities and naming of holders in the register of members by the company.
(ii) An employee of the company publicized among his social networking of sound financial position of his organization in order to incite them to purchase the shares of its company. In actuality, the company was running in loss. [RTP-May 19]
Answer:
Liability of the person for commission of the act during the course of inspection, inquiry or investigation
As per Sec. 229 of the Companies Act, 2013 where a person who is required to provide an explanation or make a statement during the course of inspection, inquiry or investigation, or an officer or other employee of a company or other body corporate which is also under investigation,-

(a) destroys, mutilates or falsifies, or conceals or tampers or unauthorisedly removes, or is a party to the destruction, mutilation or falsification or concealment or tampering or unauthorised removal of, documents relating to the property, assets or affairs of the company or the body corporate;
(b) makes, or is a party to the making of, a false entty in any document concerning the company or
body corporate; or
(c) provides an explanation which is false or which he knows to be false, he shall be punishable for fraud in the manner as provided in section 447.

Conclusion: Considering the provisions of Sec. 229 as stated above, following conclusions may be drawn:

(i) Concerned person shall be liable for fraud as he is a party in the manipulation of documents relating to the transfer of securities and in the register of members of the company which is under investigation.

(ii) Employee shall not be liable, as the said company in which he is an employee, is not undergoing investigation. Secondly, the person purchasing the shares can act with due diligence before – purchasing shares rather fully relying on the publicity made on social networking.

Set-Off or Carry Forward of Losses – CA Final DT Question Bank is designed strictly as per the latest syllabus and exam pattern.

Set-Off or Carry Forward of Losses – CA Final DT Question Bank

Question 1.
Explain in brief, the treatment as to the taxability and /or allowability, under the provisions of Income-tax Act, 1961:

‘B’ Ltd. is a company engaged in the business of financing and investment in shares. It suffered loss of ₹ 3,00,000 on account of futures and options, a transaction in the form of derivatives in which the underlying asset was shares.   [CA Final May 2010] [3 Marks]
Answer:
As per Sec. 73, loss of speculation business shall be set off only against the speculative business income. However, proviso (d) to Sec. 43(5) provides that a transaction in derivatives carried out in a recognised stock exchange, in which underlying asset is shares shall not be treated as speculative transaction. Since, the transaction is not a speculative transaction, the loss would be treated as an ordinary business loss eligible for set-off loss as per % normal set-off provisions.

Question 2.
X carrying on a business as sole proprietor, died on 31 st March, 2020. On his death, the same business was continued by his legal heirs, by forming a firm. As on 31st March 2020, a determined business loss of ₹ 5 lakhs is to be carried forward under the Income-tax Act, 1961.

Does the firm consisting of all legal heirs of Mr. X, get a right to have this loss adjusted against its current income? [CA Final May 2012] [3 Marks]
Answer:
Section 78(2) provides that where a person carrying on any business or profession has been succeeded in such capacity by another person, otherwise than by inheritance, then, the successor is not entitled to carry forward and set-off the loss of the predecessor against his income. This implies that generally, set-off of business losses should be claimed by the same person who suffered the loss and the only exception to this provision is when the business passes on to another person by inheritance.

The facts of case are similar to the facts in case of CIT v. Madhukant M. Mehta (2001) where the Supreme Court has held that if the business is succeeded by inheritance, the legal heirs are entitled to the benefit of carry forward of the loss of the predecessor.

Even if the legal heirs constitute themselves as a partnership firm, the benefit of carry forward and set off of the loss of the predecessor would be available to the firm. In this case, the business of X was continued by his legal heirs after his death by constituting a firm. Hence, the exception contained in section 78(2) along with the decision of the Apex Court discussed above, would apply in this case. Therefore, the firm is entitled to carry forward the business loss of ₹ 5 lakhs of X.

Question 3.
ST & Co., a partnership firm was dissolved and as per the dissolution deed of the partnership firm, with effect from 18th September, 2006, S, one of the partners of erstwhile firm took over the entire business of the partnership firm in his individual capacity including fixed assets, current assets and liabilities and the other partner was paid his dues. He then continued the business as a sole proprietor with effect from that date. The assessee, relying upon Section 78(2) claimed the set-off of the losses suffered by the erstwhile partnership firm against his income earned as an individual proprietor, considering the case as inheritance of business. The claim of the assessee was disallowed by the A.O.

Examine the correctness of the action of the Assessing Officer. [CA Final Nov 2016] [4 Marks]
Answer:
The issue is whether the loss of the partnership firm taken over by one of the partner can be set-off against the income of such individual proprietor considering the case of inheritance of business.

The facts of this case are similar to the facts of the case Pramod Mittal v/s CIT (2013), where the Delhi High Court observed that upon dissolution, the partnership firm ceased to exist. Also, the partnership firm and the proprietorship concern are two separate and distinct entities for the purpose of assessment.

As per sec. 170(1), in case of dissolution, the partnership firm shall be assessed as such from beginning of the year till the date of dissolution. Thereafter, the income of the sole-proprietor shall be taxable in the hands of the assessee as an individual. Thus, sec. 170(1) clearly provides as to who will be assessable in respect of the income of the previous year from the business.

Section 78(2) provides that only that person, who has incurred the losses, and no one else, would be entitled to carry forward and set-off such losses. The only exception is where there is succession by inheritance.

Thus, section 170( 1) providing the person in whose hands income is assess-able in case of succession and section 78(2) providing for carry forward of losses in case of succession of business, deal with different situations and there is no contradiction between these sections.

The High Court held that the exception u/s 78(2), allowing the carry forward of losses by the successor in case of inheritance is not applicable in the present case since the partnership firm was dissolved and ceased to continue. Taking over the business of the firm by a partner cannot be construed as a case of inheritance by death as per the law of succession. Therefore, the loss suffered by erstwhile partnership firm, cannot be carried forward by the 5 successor sole proprietor, since it is not a case of succession by inheritance.

Considering the decision pronounced in the above case, the assessee is not eligible to set-off the loss of the ST & Co. from his individual income and therefore, the contention of the A.O. to disallow such claim of assessee is correct.

Question 4.
Vishvakshena & Co. is a partnership firm. For the year ended 31.3.2021, the following particulars are made available:

1. Secret commission of ₹ 50,000 paid to Government official.
2. ₹ 12 lakhs paid as commission to a partner’s son at 0.5% of the sales value, without deduction of tax at source. Partner has 25% share in firm.
3. Loss in the above business, after considering the above items debited to the profit and loss account are:
   Business Loss ₹ 80 Lakhs, Unabsorbed depreciation ₹19 lakhs.

In addition, the firm has a warehouse business opted for section 35AD. Loss suffered therein is ₹ 55 lakhs.

The firm has filled the return of income for the assessment year 2021-22 on 29-11-2021. Specify the items (with quantum) which are eligible for carry forward to the subsequent years. Will your answer be different, if the firm has filled its return of income on 29-12-2021?

Assume that transactions in cash in respect of sale and purchase exceed 5% of the total sale and purchase.   [CA Final May 2017] [6 Marks]
Answer:
As per Sec. 44AB, the partnership firm is liable to tax audit if its turnover exceeds ₹ 1 crores (since transactions in cash in respect of sale and purchase exceed 5% of total sale and purchase, the limit of ₹ 5 crores shall not be considered) in the previous year. In this case, the turnover of Vishvakshena & Co. is ₹ 24.00 crores (₹ 12 lakhs ÷ 0.50% ), which exceeds ₹ 1 crore and therefore, it is liable for tax audit u/s 44AB for the A.Y. 2021- 1 22 and the due date of filing ROI will be 31.10.2021 (w.e.f. A.Y. 2021-22).

In this case, the firm has filed its return of loss u/s 139(3) after the due date i.e., on 29.11.2021. Hence, it is not eligible for carry forward of its business loss of ₹ 75,90,000 u/s 72(1) [See Working Note below] and its loss of ₹ 55,00,000 from specified business (referred to in section 35AD) as per section 73A(2), since, as per section 80 read with section 139(3), filing of return of income on or before the due date is necessary for carry forward of such losses.

However, there is no such restriction for carry forward of unabsorbed depreciation u/s 32(2). Therefore, it can carry forward its unabsorbed depreciation of ₹ 19 lakhs to A.Y. 2022-23.

The answer will remain the same even if the firm has filed its return of income on 29.12.2021, since both 29.11.2021 and 29.12.2021 fall beyond the due date of filing of return of income for the said firm.

Working Note:

Computation of business loss to be carried forward as per section 72(1)	₹
Loss as per profit and loss account	(80,00,000)
Add: Secret commission to a Government official not allowable as per section 37 as it is an expenditure incurred for a purpose which is an offence and prohibited by law	50,000
30% of commission paid to partner’s son without TDS to be disal­lowed u/s 40(a)(ia)                                                                     ‘	3,60,000
Business loss computed as per the provisions of the income-tax Act, 1961	(75,90,000)

Question 5.
Vaamana Pvt. Ltd., has share capital in the form of equity shares. The shares were held up till 31st March, 2019 by four members, C, D, E, and F equally. The company made losses/profits for the past three assessment years as follows:

Assessment Year	Business Loss	Unabsorbed Depreciation	Total
2017-18	Nil	5,00,000	5,00,000
2018-19	Nil	2,00,000	2,00,000
2019-20	6,00,000	6,00,000	12,00,000
Total	6,00,000	13,00,000	19,00,000

The above figures have been accepted by the Income-tax Department.

During the previous year ended 31.3.2020, C sold his shares to A and during the previous year ended 31.3.2021, D sold his shares to B. The profits for the past two previous years are as follows:
31.3.2020 – 8,00,000 (before charging depreciation of 1,00,000)
31.3.2021 – 15,00,000 (before charging depreciation of 1,50,000)
Compute the total income for the A.Y. 2021-22. Workings must form part of your answer. [CA Final May 2017, Nov. 2004] [10 Marks]
Answer:
Section 79 provides, where in any previous year, there has been a change in the shareholding of a company in which the public are not sub-stantially interested, any unabsorbed loss of the company shall be allowed to be carried forward and set off against the income of the previous year only if the beneficial shareholders of at least 51 % of the voting power on the last day of the previous year remained the same as on the last day of the year or years in which the loss was incurred.

The shareholding patterns of the company in the last three financial years are given below:

As on 31st March	C	D	E	F	A	B
	%	%	%	%	%	%
2019	25	25	25	25	–	–
2020	–	25	25	25	25	–
2021	–	–	25	25	25	25

Since shareholders holding at least 51% of the voting power are the same in the P.Y. 2018-19 and P.Y. 2019-20, the restriction imposed by section 79 is not applicable for Set-off of losses of the P.Y. 2018-19 against income of the P.Y. 2019-20.

Taxable income for the Assessment Year 2020-21

Balance unabsorbed depreciation relating to the earlier assessment year can be carried forward to the next assessment year i.e., A.Y. 2021-22 for set-off against income of that year. There is no brought forward business loss and the restriction contained in section 79 is not applicable in case of carry forward of unabsorbed depreciation. Section 32 governs the carry forward and set off of depreciation for which the shareholding pattern is not relevant at all.

Question 6.
Surat Limited, engaged in the business of textiles also effected the sales and purchase of shares of other companies. It suffered loss from such transactions:

1. Whether such company can set off its losses from share trading, from the profit of textile business.
2. If principal business of such company is sale and purchase of shares of other company then what would be your answer?  [CA Final May 2018 (New Syllabus)] [4 Marks]

Answer:
As per Explanation to Sec. 73, if any company deriving its income mainly under the head “Profits and Gains of Business or Profession” (other than a company whose principal business is trading in shares or banking or granting loans and advances) and any part of its business consisting of purchase or sale of shares, then such part of the business shall be deemed to be speculation business.

In this case, Surat Ltd. is engaged in the business of textiles and also effected the sales and purchase of shares of other companies. Therefore, the purchase and sale of shares of other companies by Surat Ltd. shall be deemed to be speculation business:

(i) As per Sec. 70, loss from a speculation business can be set off only against speculation business income and therefore, the company cannot set-oil its loss Irom share trading against the profit of textile business.

(ii) If principal business ol the company is sale and purchase of shares of other company, then the answer would be different, since Explanation to Sec. 73 shall not be applicable and the sale and purchase of shares of other companies shall not be treated as speculation business. Therefore, the company can set-olf the losses from share trading against the profit of textile business.

Question 7.
On 1.4.2020, Wuyu Ltd. was amalgamated with Rayu Ltd. satisfying all the conditions mentioned in section 2(1B).
Wuyu Ltd. had the following brought forward losses as assessed till the assessment year 2020-21:

	₹ in lakhs
Speculation business loss	5.00
Unabsorbed Depreciation	13.00
Business loss	150.00
Unabsorbed expenditure of capital nature on scientific research	3.00

Rayu Ltd. has computed a profit of ₹ 180 lakhs for the financial year 202021 before setting off the eligible losses of Wuyu Ltd. but after providing depreciation @ 15% p.a. on ₹ 140 lakhs, being the consideration at which plant and machinery were transferred by Wuyu Ltd. to Rayu Ltd. The WD V as per Income-tax records of Wuyu Ltd. as on 1.4.2020 was ₹ 98 lakhs.

The above profit of Rayu Ltd. includes speculation business profit of ₹ 15 lakhs. Compute the total income of Rayu Ltd. for the A.Y. 2021-22 and indicate the losses/other allowances to be carried forward by it. Assume the amalgamation is within the meaning of section 72A of the Income-tax Act, 1961. Give reasons for treatment of each item. [CA Final May 2019 (Old Syllabus), Nov 2010] [8 Marks]
Answer:
Computation of Total Income of Rayu Ltd for the A.Y. 2021-22

Notes:
1.

2. In case of amalgamation of companies, the unabsorbed losses and unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or unabsorbed depreciation of the amalgamated company for the previous year in which the amalgamation was effected and such business loss and unabsorbed depreciation shall be carried forward and set-off by the amalgamated company for a period of 8 years and indefinitely, respectively.

3. As per section 72A(7), the accumulated loss to be carried forward specifically excludes loss sustained in a speculative business. Therefore, speculative loss of ₹ 5 lakhs of Wayu Ltd. cannot be carried forward by Ravu Ltd.

4. Section 72(2) provides that where any allowance or part thereof unabsorbed u/s 32(2) (i.e., unabsorbed depreciation) or section 35(4) (i.e., unabsorbed scientific research capital expenditure) is to be carried forward, effect has to be first given to brought forward business losses u/s 72.

5. Section 35(4) provides that the provisions of section 32(2) relating to unabsorbed depreciation shall apply in relation to deduction allowable under section 35(1)(iv) in respect of capital expenditure on scientific research related to the business carried on by the assessee. Therefore, unabsorbed capital expenditure on scientific research can be set-off and carried forward in the same manner as unabsorbed depreciation.

6. The restriction contained in section 73 is only regarding set-off of loss computed in respect of speculative business. Such a loss can be set-off only against profits of another speculation business and not non-speculation business. However, there is no restriction regarding set-off of normal business losses against speculative income. Therefore, normal business losses can be set-off against profits of a speculative business. Consequently, there is no loss or allowance to be carried forward by Rayu Ltd. to the A.Y. 2022-23.

Income of Other Persons, Included in Assessee’s Total Income – CA Final DT Question Bank is designed strictly as per the latest syllabus and exam pattern.

Income of Other Persons, Included in Assessee’s Total Income – CA Final DT Question Bank

Question 1.
State the situations under which the clubbing provisions of income-tax operate as to the incomes of husband and wife. [CA Final May 2010] [4 Marks]
Answer:
As per section 64(1), in computing the total income of any individual, there shall be included all such income arising directly or indirectly to the spouse by way of –

1. salary, commission, fees or any other form of remuneration, whether in cash or in kind, from a concern in which such individual has substantial interest;
2. income from any asset transferred to the spouse by the individual otherwise than for adequate consideration or in connection with an agreement to live apart.

As per section 27 (i), an individual who transfers, otherwise than for adequate consideration, any house property, to his or her spouse, not being a transfer in connection with an agreement to live apart, is deemed to be the owner of the house property so transferred. Accordingly, in such a case, the income from house property would be taxable in the hands of the Individual.

Question 2.
Mrs. E, wife of Mr. F, is a partner in a firm. Her capital contribution in the firm as on 01-04-2020 was ₹ 5 lakhs, out of which ₹ 3 lakhs was contributed out of her own sources and ₹ 2 lakhs was contributed out of gift from her husband. As further capital was needed by the firm, she further invested ₹ 2 lakhs on 01.05.2020 out of the funds gifted by her husband. The firm paid interest on capital of ₹ 80,000 and share of profit of ₹ 60,000 for the financial year 2020-21. Advise Mr. F as to the applicability of section 64(1)(iv) and the manner thereof in respect of the above j referred transactions. [CA Final Nov. 2010] [5 Marks]
Answer:
Section 64(1)(iv) provides for the clubbing of all such income as arises, directly or indirectly, to the spouse of an individual from assets (other than house property) transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart.

Further, as per Explanation 3 to section 64(1), for the purpose of clubbing under section 64(1)(iv), where the assets transferred are invested by the spouse as capital contribution as a partner in a firm, proportionate interest on capital will be clubbed with the income of the transferor.

Such proportion has to be computed by taking into account the value of the aforesaid investment as on the first day of the previous year to the total investment by way of capital contribution as a partner in the firm as on that day.

Now in view of the above provision, interest received by the spouse Mrs. E from the firm shall be included in total income of Mr. F to the extent of ₹ 32,000 i.e., ₹ 80,000 × ₹ 2,00,000/₹ 5,00,000. (assumed that rate of interest on capital contributed by Mrs. E does not exceed 12% p.a.). Any amount further invested in the-business of the firm during the mid of the year by the spouse out of the money gifted by her husband shall be ignored for the proportion of the income to be clubbed for the year.

Share of profit amounting to ₹ 60,000 is exempt u/s 10(2A). The provisions of section 64 will not apply, if the income from the transferred asset itself is exempt from tax.

Practical Questions

Question 3.
Mr. Ashish has gifted a house property valued at ₹ 50 lakhs to his wife, Mrs. Asha, who in turn has gifted the same to Mrs. Swati, their daughter-in-law. The house was let out at ₹ 25,000 per month throughout the year. Compute the total income of Mr. Ashish and Mrs. Swati. Will your answer be different if the said property was gifted to his son, husband of Mrs. Swati? [CA Final May 2013] [4 Marks]
Answer:
As per section 27, where any house property is transferred by an individual to his spouse otherwise than for adequate consideration or not being a transfer in connection with an agreement to live apart, the individual shall be deemed to be the owner of the house property so transferred.

Further, as per section 64(1)(vi), income arising to the son’s wife from assets transferred, directly or indirectly, to her otherwise than for adequate consideration would be included in the total income of such individual.

In light of above provision, Mr. Ashish would be the deemed owner of the house property transferred to his wife Mrs. Asha without consideration. Income from let-out property of ₹ 2,10,000 [i.e., ₹ 3,00,000, being the actual rent calculated at ₹ 25,000 per month less ₹ 90,000, (deduction u/s 24 @ 30%)] arising to Mrs. Swati, being Mr. Ashish’s son’s wife, shall be clubbed in the income of Mr. Ashish. Such income would not be taxable in the hands of Mrs. Swati.

In case the property was gifted to Mr. Ashish’s son, the clubbing provisions u/s 64 would not apply, since the son is not a minor child. Therefore, the income of ₹ 2,10,000 from letting out of property gifted to the son would be taxable in the hands of the son.

Note: Section 56(2)(x) would not be attracted in the above case, since the receipt of property was from a “relative” of such individual. Therefore, the stamp duty value of house property would not be chargeable to tax in the hands of the recipient of immovable property, even though the house property was received by her or him without consideration.

The first part of the question can also be answered by applying the provisions of section 64(1)(vi) directly to include the income of ₹ 2,10,000 arising to Mrs. Swati in the hands of Mr. Ashish, since section 64(1)(vi) provides for clubbing of income arising to son’s wife even from indirect transfer of assets to her by her husband’s parent, without consideration. Gift of house property by Mr. Ashish to Mrs. Swati, via Mrs. Asha, can be viewed as an indirect transfer by Mr. Ashish to Mrs. Swati.

Question 4.
Raju gifted amount of ₹ 5,00,000 to the wife of his brother which was used by her for the purchase of a house and simultaneously, on the same day, Raju’s brother gifted shares owned by him in a foreign company worth ₹ 5,00,000 to the minor son of Raju. What will be the impact of i such transfers in the hands of both the transferors and the transferees? [CA Final May 2014, Nov 2013, May 2011] [4 Marks]
Answer:
In the given case, Raju gave a gift of ₹ 5,00,000 to his brother’s wife for the purchase of a house by her and simultaneously, his brother gave a gift of shares owned by him in a foreign company worth ₹ 5,00,000 to I the minor son of Raju. These transfers are in the nature of cross transfers.

In the case of CIT vs. Keshavji Morarji (1967), the Supreme Court held that if two transactions are inter-connected and are part of the same transaction in such a way that it can be said that the circuitous method was adopted as a device to evade tax, the implication of clubbing provisions would be attracted.

Accordingly, the income arising to the wife of Raju’s brother from the house property would be included in the total income of his brother and the dividend from shares transferred to Raju’s minor son would be included in the total income of Raju because both Raju and his brother are the indirect transferors of the income yielding assets to their minor child and spouse, respectively, with an intention to reduce their burden of taxation.

However, as per section 56(2)(x), since husband’s brother and father’s brother fall within the definition of “relative”, the sum of money and property, respectively, received from them would be exempt in the hands of the concerned transferee.

Question 5.
Examine the correctness of the claim made by the assessee in the below mentioned case.

Mr. Johny has business income of ₹ 4,28,000 and salary income of ₹ 1,30,000 for the financial year 2020-21. His minor son has agricultural income of ₹ 1,00,000 for the same year. The Assessing Officer clubbed the agricultural income of minor son for determining the income tax liability of Mr. Johny. Mr. Johny contends that the agricultural income is exempt u/s 10(1) and not covered by section 2(24) and hence, should not be clubbed even for adopting higher income-tax rate. [CA Final May 2015] [4 Marks]
Answer:
The facts of the case are similar to Suresh Chand Talera v. Union of India (2006) (M.P.) in which the High Court observed that even though agricultural income has not been specifically included in section 2(24), it does not mean that agricultural income is not an “income”, because the definition of income given u/s 2(24) is inclusive and not exhaustive.

Further Section 10(1) of the Act provides that in computing the income of the previous year of a person, “agricultural income” shall not be included. Thus, Section 10(1) makes it clear that agricultural income is income but by express provision therein, agricultural income has been excluded from the total income of the assessee for the purpose of levy of income-tax.

Section 4(1), which is the charging section, provides that while the total income of person is to be determined, the rate at which income-tax will 1 be paid on such income will be stipulated in the relevant Finance Act. The Annual Finance Act provides [under Chapter II section 2] that the net agricultural income shall be taken into account in the manner provided therein for the purpose of determining the rates of income-tax applicable to the income of the assessee.

Therefore, in view of the above provisions, the High Court held that agricultural income of the minor son of the assessee has to be clubbed in the income of the assessee for the purpose of determining the rate of income-tax applicable to the assessee.

Applying the above rationale of High Court ruling, the contention of Mr. Johny is incorrect. The agricultural income of his minor son, has to be included in the income of Mr. Johny for rate purposes, since the words “income as arises or accrues to his minor child” used in section 64(1A) includes agricultural income also.

Question 6.
Mr. Ravi has gifted his only house property to his wife, Mrs. Ravi, and his minor married daughter, Mrs. Divya. The Assessing Officer has served a notice of demand on Mr. Ravi for payment of tax for the income derived from the said house property. Examine the validity of the Assessing Officer’s action. [CA Final May 2016] [2 Marks]
Answer:
As per sec. 21 (i), if an individual transfers any house property to his or her spouse (except with an agreement to live apart) or to a minor child (except to minor married daughter), otherwise than for adequate consideration, the transferor in that case is deemed to be the owner of the property so transferred.

But here, in this case, the assessee Mr. Ravi has gifted his house property to his wife Mrs. Ravi and his minor married daughter Mrs. Divya. So Mr. Ravi will be taxable only to the extent of Mrs. Ravi share in the house property as he is the deemed owner as per sec. 21 (i). And for the share of minor married daughter, Mr. Ravi shall not be the deemed owner and therefore, he shall not be taxable in respect of share of minor married daughter in the house property.

Further as per sec. 64(1 A), all income which accrues or arises to a minor shall be clubbed in the income of that of his parent whose total income excluding the income clubbed under this sub-section) is greater except when the minor is suffering from any disability u/s 80U or when the income accrues or arises to a minor child is by way of manual work done by him or by application of his/her skill, talent or specialized knowledge and experience.

Therefore, the income of minor married daughter shall also be clubbed in the hands of Mr. Ravi by assuming that his income is higher than the income of Mrs. Ravi (excluding such income). But he shall be eligible for exemption upto ₹ 1,500 as per sec. 10(32) in respect of minor child income clubbed in his hands.

So the contention of the A.O. is valid in this case.

Question 7.
Parmatma settled 1/4th share of his property under a trust for the education and maintenance of his minor daughter, Moni. Under the terms of the trust deed, the income accruing to the trust, after meeting the expenses of maintenance and education of Moni, was to be accumulated and paid over to her on her attaining majority. The Assessing Officer assessed the income arising from 1/4th share of the property, settled for the benefit of Moni, in the hands of Parmatma. Examine the correctness of the assessment. [CA Final May 2016, Nov. 2013, May 2009] [5 Marks]
Answer:
As per section 64(1A), the income of a minor child shall be clubbed in the total income of that parent, whose total income before such inclusion is higher.

Now the Supreme Court in the case of CIT v. M.R. Doshi (1995), held that clubbing of income is applicable only where the income accrues to the minor during his minority and it is enjoyed by the minor during the i period of minority. Thus, where a trust is created for the benefit of a minor child and the income from the trust was to be accumulated until the child attained majority, the clubbing provisions would not get attracted, since 1 no benefit accrues to the minor child during the period of his minority.

However, in the given question, the minor daughter Moni is eligible for the benefits during her minority, since income from the trust is being used for meeting her education and maintenance expenses. Only the remaining income is to be accumulated and paid over to her on her attaining majority. Therefore, since benefit under the terms of the trust deed is accruing, even though to a limited extent, the above decision of Supreme Court cannot be applied, in full, in this case.

Only so much of income as is used for meeting the education and maintenance expenses of Moni during the current year should be clubbed in the hands of Parmatma after providing for an exemption of ₹ 1,500 under section 10(32) ; assuming that Parmatma’s total income is greater than his spouse’s total income. The income accumulated and to be paid to her op her attaining majority shall not be clubbed.

Thus the contention of the Assessing Officer is partly correct.

Question 8.
In 2014, Brijesh borrowed ₹ 15 lakhs at 15% interest per annum from Ashok for his business purpose. This loan has not been repaid so far by Brijesh. His average bank balance in current account was around ₹ 7 lakhs on which the bank was not paying him any interest. On 1st June, 2020 Brijesh’s wife, Tina borrowed from him ₹ 7.50 lakhs repayable on demand at 7.5% interest per annum. She lent this money and received interest @ 18% per annum. In course of assessment of Brijesh, the A.O. disallowed 50% of this interest paid to Ashok on the ground that the loan to the extent of 50% has been diverted for non-business purpose i.e. for lending to wife. Further, interest earned by Tina by advancing ₹ 7.50 lakhs was included in the hands of Brijesh by invoking section 64(1 )(iv). Examine the correctness of the action of the Assessing Officer. [CA Final Nov 2017] [4 Marks]
Answer:
There are two issues involved in the case which are dealt with as follow:
1. Advancing a loan is not a transfer of asset, so no clubbing shall be done for the interest earned on further advancing of loan, hence section 64(1)(iv) shall not be attracted. Hence, interest income earned by Tina @18% from the amount borrowed from the Brijesh shall not be clubbed.

2. As 50% of interest expense is not incurred wholly and exclusively for the purpose of business or profession, the contention of A.O. to disallow 50% of the interest paid to Ashok on the ground that the loan to the extent of 50% has been diverted for non-business purpose i.e. for lending to wife is correct in law as per sec. 37(1).