CA Intermediate

Income from Salaries – CA Inter Tax Study Material is designed strictly as per the latest syllabus and exam pattern.

Income from Salaries – CA Inter Taxation Study Material

Introduction

Question 1.
Mr. M is an area manager of M/s N Steels Company Limited. During the financial year 2020-21, he gets following emoluments from his employer:
Basic Salary
Up to 31.08.2020 ₹ 20,000 pm
From 01.09.2020 ₹ 25,000 pm
Transport Allowance ₹ 2,000 pm
Contribution to recognized provident fund ₹ 15% of Basic Salary and DA
Children Education Allowance ₹ 500 pm for two children
City Compensatory Allowance ₹ 300 pm
Hostel Expenses Allowance ₹ 4,560 for two children
Tiffin Allowance ₹ 5,000 pa. Actual Expenses of Tiffin ₹ 3,700
Tax paid on employment ₹ 2,500
Compute Taxable Salary of Mr. M for the Assessment year 2021-22. [Nov. 2008, 6 Marks]
Answer:
Computation of Taxable Salary of Mr. M for the Assessment Year 2021-22

Particulars	Amount (₹)	Amount (₹)
Basic Salary Up to 31.08.2020 [₹ 20,000 pm × 5]	1,00,000
Basic Salary from 01.09.2020 [₹ 25,000 pm × 7]	1,75,000	2,75,000
Transport Allowance [₹ 2,000 pm × 12]		24,000
Contribution to RPF in excess of 12% of Salary [Working Note 1]                                                                                                                ‘		8,250
City Compensatory Allowance [300 pm × 12]		3,600
Children Education Allowance [₹ 500 pm × 12]	6,000
Less: Exempt [₹ 100 × 2 × 12]	2,400	3,600
Hostel Expenses Allowance	4,560
Less: Exempt [₹ 190 × 2 × 12]	4,560	NIL
Tiffin Allowance		5,000
Tax paid on employment		2,500
Gross Salary		3,21,950
Less: Standard Deduction u/s 16 (ia)	50,000
Less: Professional Tax u/s 16(iii)	2,500	52,500
Net Salary		2,69,450

Working Notes:
1. Employer contribution to RPF in excess of 12% of Salary.

Question 2.
From the following details find out the salary chargeable to tax for the assessment year 2021-22

Mr. X is regular employee of Rama & Company in Gurgaon. He was appointed on 01.01.2020 in the scale of 20,000-1,000-30,000. He is paid D.A 10% of Basic Pay and Bonus equivalent to one month pay. He contributes 15% of his pay and D.A. towards his recognized provident fund and the company contributes the same amount.

He is provided Rent free housing facility which has been taken on rent by the company at ₹ 25,000 pm. He is also provided with following facilities:

1. Facility of Laptop Costing ₹ 50,000
2. Company reimbursed the medical treatment bill of his brother of ₹ 10,000 who is dependent on him.
3. The monthly salary of ₹ 1,000 of a house keeper is reimbursed by the company.
4. Gift voucher of ₹ 10,000 on the occasion of his marriage anniversary.
5. Conveyance allowance of ₹ 1,000 per month is given by the company towards actual reimbursement.
6. He is provided personal accident policy for which premium of ₹ 5,000 is paid by the company.
7. He is getting telephone allowance @500 per month. [Nov. 2010, 8 Marks]

Answer:
Computation of Taxable Salary of Mr. X for the Assessment Year 2021-22

Note: Value of Rent Free House

Particulars	Amount (₹)
Salary = 2,43,000 + 24,300 + 20,250 + 6,000 = 2,93,550	‘ 2,93,550
15% of Salary = 2,93,550 × 15 /100 = 44,033	44,033
Rent paid by Company = 25,000 × 12 = 3,00,000	3,00,000
15% of salary or Rent paid whichever is Less is Value of RFH	44,033

Question 3.
Mr. Shah, an Accounts Manager, has retired from JK Ltd. on 15.01.2021 after rendering services for 30 years 7 months. His salary is ₹ 25,000/ p.m. up to 30.09.2020 and ₹ 27,000 thereafter. He also gets ₹ 2,000 p.m. as dearness allowance (55% of it is a part of salary for computing retirement benefits. He is not covered by the payments of Gratuity Act, 1972. He has received ₹ 8,00,000 as gratuity from his employer company. Compute the exemption u/s 10(10) and gross income under the head Salary. [Nov. 2010, 4 Marks]
Answer:
Computation of Taxable Salary of Mr. Shah for the Assessment Year 2021 -22

Particulars	Amount (₹)
Basic Salary [(25,000 × 6) + (27,000 × 3.5)]	2,44,500
Dearness Allowance [2,000 × 9.5]	19,000
Gratuity (Working Note 1)	3,99,500
Gross Salary	6,63,000
Standard Deduction	50,000
Taxable Salary	6,13,000

Working Note 1:
Computation of Taxable Gratuity of Mr. Shah for the Assessment Year 2021-22

Particulars	Amount (₹)
Basic Salary for 10 Months [(25,000 × 7) (27,000 × 3)]	2,56,000
Dearness Allowance [2000 × 10 × 55/100]	11,000
Total of 10 Months Salary	2,67,000
Average Salary = 2,67,000/10 = 26,700	26,700
Gratuity Provision:
Least of the following is exempt
1. Actual Amount Received	8,00,000
2. Maximum Amount notified	20,00,000
3. \(\frac{1}{2}\) × 26700 × 30	4,00,500
Least Amount among above three	4,00,500
Exempt Amount	4,00,500
Received Amount	8,00,000
Taxable Amount [8,00,000 – 4,00,500]	3,99,500

Formula of Gratuity for above 3:
\(\frac{1}{2}\) × Average Salary for 10 months Preceding the month of retirement × No. of years of Completed Years

Question 4.
Mr. Balaji employed as Production Manager in Beta Limited furnishes you the following information for the year ended on 31.03.2021:

1. Basic Salary up to 31.10.2020 ₹ 50,000 pm
2. Basic Salary From 01.11.2020 ₹ 60,000 pm (Salary is due and paid on the last day of every month)
3. Dearness Allowance @ 40% of Basic Salary.
4. Bonus equal to one month salary paid in October 2020 on Basic Salary plus Dearness Allowance applicable for that month.
5. Contribution of employer to recognized provident fund account of the employee @16% of Basic Salary.
6. Profession Tax paid ₹ 3,000 of which ₹ 2,000 was paid by the employer.
7. The facility of laptop and computer was provided to Balaji for both official and personal use. Cost of laptop ₹ 45,000 and computer ₹ 35,000 was acquired by the company on 01.12.2019.
8. Motor car owned by the employer cubic capacity of engine exceeds 1.60 Litre provided to the employee from 01.11.2020 Meet for both official and personal use. Repair and running expenses of ₹ 45,000 from 01.11.2020 to 31.03.2021, were fully met by the employer. The motor car was self-driven by the employee.
9. Leave travel concession given to employee his wife and three children (one daughter age 7 and twin sons Age 3). cost of air tickets economic class reimbursed by the employer ₹ 30,000 for adults and ₹ 45,000 for 3 children. Balaji is eligible for availing exemption this year to the extent, it is permissible in law.

Compute the salary income chargeable to tax in the hands of Mr Balaji for the assessment year 2021-22. [May. 2013, 8 Marks]
Answer:
Computation of Taxable Salary for the Assessment Year 2021-22

Particulars	Amount (₹)	Amount (₹)
Basic Salary [(50,000 × 7) + (60,000 × 5)]		6,50,000
Dearness Allowance [40% of ₹ 6,50,000]		2,60,000
Bonus [(50,000 + 50,000 × 40/100) = 70,000		70,000
Employer Contribution in RPF in excess of 12% [6,50,000 × 4/100]		26,000
Professional Tax paid by Employer		2,000
Facility of Laptop and Computer		Exempt
Motor Car [ 2400 × 5] = 12000		12,000
Leave Travel Concession		NIL
Gross Salary		10,20,000
Less: Standard Deduction u/s 16	50,000
Less: Professional Tax u/s 16 (iii)	3,000	53,000
Taxable Salary		9,67,000

Note:
1. Leave Travel Concession is available up to two children. Children born after 01.10.1998 out of multiple births after the first birth will be treated as one child only. Hence it is exempt here.

Question 5.
Mr Mohit is employed with XY Limited on a basic salary of ₹ 10,000 per month. He is also entitled to dearness allowance @100% of basic salary, (50% of which is included in salary as per terms of employment). The company gives him house rent allowance of ₹ 6,000 per month which was increased to ₹ 7,000 per month with effect from 01.01.2021. He also got an increment of ₹ 1,000 per month in his basic salary with effect from 01.02.2021. Rent paid by him during the previous year 2020-21 is as under:
April and May 2020 – nil as he stayed with his parents
June to October 2020 – ₹ 6,000 per month for an accommodation in Ghaziabad
November 2020 to March 2021 – ₹ 8,000 per month for an accommodation in Delhi.
Compute his gross salary for the Assessment Year 2021-22. [May. 2012, 8 Marks]
Answer:
Computation of Gross Salary of Mr. Mohit for the Assessment Year 2021 -22

Particulars	Amount (₹)	Amount (₹)
Basic Salary
April 2020 to Jan 2021 [ 10,000 × 10 ]	1,00,000
Feb 2021 to March 2021 ] 11,000 × 2]	22,000	1,22,000
Dearness Allowance [100% × of Basic Salary]		1,22,000
House Rent Allowance [Working Note 1]		21,300
Gross Salary		2,65,300

Working Note: (House Rent Allowance)

Question 6.
(a) Rajesh went to Srinagar on a holiday on 15.11.2020 with his wife and two children (one son is 6 years and twin daughters 3 years). They went by aeroplane economic class and the total cost of tickets by his employer was ₹ 58,000 (₹ 43,000 adults and ₹ 15,000 for the three minor children). Compute the amount of leave travel concession exempt.
Will the answer be any different if among his three children the twins are 6 year old and son three years old.

(b) Mr Govind received retrenchment compensation of ₹ 10,00,000 after 30 years 4 months of service. At the time of retrenchment he was receiving basic salary of ₹ 20,000 per month dearness allowance ₹ 5,000 per month. Compute his taxable retrenchment compensation. [May. 2013, 4+4 Marks]
Answer:
(a) Case 1: One Son Is 6 Years And Twin Daughters 3 Years Old
Computation of Taxable Leave Travel Concession u/s 10(5) for the Assessment Year 2020-2021

Particulars	Amount (₹)
Cost of Travel in Economy Class
For the Spouse and Assessee himself	43,000
For Children – First Child is Son 6 years old and Second Children are twin (Then Twins are treated as One Child and exemption is available to all)	15,000
Total Exemption	58,000

Case 2: Twins Are 6 Year Old And Son Three Years Old.
Computation of Taxable Leave Travel Concession u/s 10(5) for the Assessment Year 2020-2021

Particulars Cost of Travel in Economy Class	Amount (₹)
For the Spouse and Assessee himself	43,000
For Children – First Child is twin daughter 6 years old and Second Child is Son 3 years old (Then exemption is not available to Son, as the twin daughters are considered as Two Children). Hence exemption will be ₹ 15,000 × 2/3 = 10,000	10,000
Total Exemption	53,000

Note:
1. The Exemption will be available only for two surviving children of an individual born after 01.10.1998. There is no restriction for children born before 01.10.1998 and also in case of multiple births after one child.

(b) Computation of Taxable Amount of Retrenchment Compensation of Mr. Govind for the Assessment Year 2021-2022

Particulars	Amount (₹)
Basic Salary pm	20,000
Dearness Allowance pm	5,000
Salary for the purpose of Retrenchment Compensation	25,000
No. of years Service Completed Years or Part thereof in excess of 6 months	30
Maximum Limit	5,00,000
Amount of Compensation Received	10,00,000
Least of the Following is Exempt
1. Actual Amount Received	10,00,000
2. Maximum Limit	5,00,000
3. Amount under Industrial Dispute Act, 1947= \(\frac{15}{30}\) × 25,000 × 30 = 3,75,000	3,75,000
Exempt	3,75,000
Received	10,00,000
Taxable	6,25,000

Question 7.
From the following details, Find out the salary chargeable to tax of Mr Anand for the Assessment Year 2021-22:

Mr Anand is a regular employee of Malpani Limited in Mumbai. He was appointed on 01.03.2020 in the pay scale of 25,000-2,500-35,000. He is paid dearness allowance (which forms part of salary for retirement benefits) @ 15% of basic pay and bonus equivalent to one and a half months basic pay as at the end of the year. He contributes 18% of his salary (basic pay plus dearness allowance) towards recognized provident fund and the company contributes the same amount.

He is provided with rent free housing facility which has been taken on rent by the company at ₹ 15,000 per month. He is also provided with the following facilities:

1. The company reimbursed the medical treatment bill of ₹ 40,000 of his daughter who is dependent on him.
2. The monthly salary of ₹ 2,000 of a housekeeper is reimbursed by the company.
3. He is getting telephone allowance @ ₹ 1,000 per month
4. A gift voucher of ₹ 4,700 was given on the occasion of his marriage anniversary
5. The company pays medical insurance premium to effect and insurance on the health of Mr Anand ₹ 12,000.
6. Motor car running and maintenance charges fully paid by employer of ₹ 36,600 (the motor car is owned and driven by Mr Anand. The engine cubic capacity is below 1.6 litre. The motor car is used for both official and personal purpose by the employee.
7. Value of free lunch provided during the office hours is ₹ 2,200. [Nov. 2013, 8 Marks]

Answer:
Computation of Taxable Salary of Mr Anand for the Assessment Year 2021-22

Working Notes:
1. Employer Contribution in RPF in excess of 12%:

• Salary for the purpose of Recognized Provident Fund = 3,02,500 + 45,375 = 3,47,875
• Employer Contribution in RPF = 18% of 3,47,875 = 62,618
• Exempt to the extent = 12% of 3,47,875 = 41,745
• Taxable Amount = 62,618 – 41,745 = 20,875

2. Rent Free Unfurnished Accommodation:

• Salary for the purpose of Rent Free Unfurnished Accommodation
  Basic + Dearness Allowance + Bonus + Telephone Allowance
  3,02,500 + 45,375 + 41,250 + 12,000 = 4,01,125
• 15% of Salary = 60,169
• Rent paid by Employer to Landlord = 1,80,000
• Valuation of RFFI = 15% of Salary or Actual Rent paid by Employer to Landlord whichever is less
• = 60,169 or 1,80,000 whichever is less
• = 60,169

3. Motor Car Valuation:

• Motor Car is owned by Employer.
• Motor Car running and maintenance expenses paid by employer.
• Actual Expenses Incurred by the Employer = 36,600
• Amount Exempt to the extent = @1,800 pm being small car.
• Valuation = 36,600 – 21,600 = 15,000

Question 8.
Ms. Rakhi is an employee in a private company. She receives the following medical benefits from the company during the previous year 2020-21:

1. Reimbursement of following medical expenses incurred by Miss. Rakhi
   • On the treatment of her self-employed daughter in a private clinic ₹ 4,000
   • On the treatment of herself by family doctor ₹ 8,000
   • On treatment of her mother-in-law dependent on her in a Nursing Home ₹ 5,000
2. Payment of premium on mediclaim policy taken on her health ₹ 7,500
3. Medical allowance ₹ 2,000 per month
4. Medical expenses reimbursed on her son’s treatment in a government hospital ₹ 5,000
5. Expenses incurred by company on the treatment of her minor son abroad ₹ 1,05,000
6. Expenses in relation to foreign travel and stay of Rakhi and her son abroad for medical treatment (limit prescribed by RBI for this is ₹ 2 lacs) ₹ 1,20,000.

Discuss about the taxability of above benefits and allowance in the hands of Rakhi. [May. 2009, 2 Marks]
Answer:
Taxability of Medical benefits and allowances in the hands of Ms. Rakhi for the Assessment Year 2021-22

Question 9.
Mr Anand is an employee of XYZ company limited at Mumbai and covered by Payment of Gratuity Act retires at the age of 64 years on 31.12.2020 after completing 33 years and 7 months of service. At the time of retirement his employer pays ₹ 20,51,640 as gratuity and ₹ 6,00,000 as accumulated balance of recognized provident fund. He is also entitled for monthly pension of ? 8,000. He gets 75% of pension commuted for ₹ 4,50,000 01.02.2021.

Determine the salary chargeable to tax for Mr Anand for the assessment year 2021-22 with the help of the following information’s:

1. Basic salary (₹ 80,000 × 9) ₹ 7,20,000
2. Bonus ₹ 36,000
3. House rent allowance (₹ 15,000 × 9) ₹ 1,35,000
4. Rent paid by Mr Anand (₹ 10,000 × 9) ₹ 1,20,000
5. Employer contribution towards recognised provident fund ₹ 1,10,000
6. Professional tax paid by Mr Anand ₹ 2,000

Note: salary and pension Falls due on the last day of each month. [Nov. 2014, 8 Marks]
Answer:
Computation of Taxable Salary of Mr Anand for the Assessment Year 2021-22

Particulars	Amount (₹)	Amount (₹)
Salary (80,000 ×9)		7,20,000
Bonus		36,000
House Rent Allowance (Working Note 1)		1,17,000
Employer Contribution in RPF in excess of 12% (Working- Note 2)		23,600
Pension		12,000
Gratuity (Working Note 3)		4,82,409
Commuted Value of Pension (Working Note 4)		2,50,000
Accumulated Balance of Recognized Provident Fund		Exempt
Gross Salary		16,41,009
Less: Deductions u/s 16(ia) Standard Deduction	50,000
Less: Deductions u/s 16(iii) Professional Tax	2,000	52,000
Taxable Salary		15,89,009

Working Notes:
1. House Rent Allowance (Only for nine months)

• • Salary for the purpose of HRA = 7,20,000
  • HRA received = 15,000 × 9 = 1,35,000
  • Rent paid in Mumbai = 10,000 × 9 = 90,000
  • 10% of Salary = 72,000
  • 50% of Salary (Being in Mumbai) = 3,60,000
    • Least of the following is exempt:
      (1) Actual HRA received = 1,35,000
      (2) Rent paid – 10% of Salary = 90,000 – 72,000 = 18,000
      (3) 50% of Salary (Being in Mumbai) = 3,60,000
      • Exempt = 18,000
      • Taxable = Received – Exempt = 1,35,000 – 18,000 = 1,17,000

2. Employer Contribution in RPF in excess of 12%

• Salary for the purpose of Recognized Provident Fund = 7,20,000
• Employer Contribution in RPF = 1,10,000
• Exempt to the extent = 12% of 7,20,000 = 86,400
• Taxable Amount = 1,10,000 – 86,400 = 23,600

3. Gratuity

• Salary for the purpose of Gratuity (Covered by Payment of Gratuity Act)
  = Basic + Dearness Allowance = 80,000 + 0
  = Last Salary drawn = 80,000
• Actual Amount of Gratuity received = 20,51,640
• No. of completed years of Services or part thereof = 34 years
• Notified amount = 20,00,000
• Least of the following is exempt
  (1) Actual Amount of Gratuity received = 20,51,640
  (2) Notified Amount = 20,00,000 15
  (3) \(\frac{15}{26}\) × 80,000 × 34 = 15,69,231
  Exempt = 15,69,231
  Taxable = Received – Exempt = 20,51,640 – 15,69,231 = 4,82,409

4. Commuted Value of Pension

• Actual Amount of Commuted Pension receive = 4,50,000
• 75% received = 4,50,000
• Full Value = 450000 × \(\frac{100}{75}\) = 6,00,000
• Exempt u/s 10(10A) = 1 /3rd of Full value of Pension
  600000 × \(\frac{1}{3}\) = 2,00,000
• Taxable = Receive – Exempt = 4,50,000 – 2,00,000 = 2,50,000

Question 10.
Compute the amount of LTC exemption in the following cases with the reference to the provision under Income Tax Act 1961
(a) Mr Suresh went on a holiday on 09.09.2020 to Mysore with his wife and three children- one daughter born on 02.02.2011 and twin sons born on 05.05.2013. The total cost of travel was ₹ 80,000. The ticket cost for Mr Suresh and his wife w as ₹ 50,000 and for all three children was ₹ 30,000. The employer reimburse total ticket cost ? 80,000.

(b) In the above case (a) if among his three children the Twin sons born on 02.02.2011 and the daughter was born on 05.05.2013, what shall b be the exemption ? [May 2009, 2 Marks]
Answer:
Case 1: First Child is daughter born on 02.02.2011 and Second Children ; are twin born on 05.05.2013
Computation of Taxable Leave Travel Concession u/s 10(5) for the Assessment Year 2020-21

Particulars	Amount (₹)
Cost of Travel
For the Spouse and Assessee himself	50,000
For Children – First Child is daughter born on 02.02.2011 and Second Children are twin born on 05.05.2013 (Then Twins are treated as One Child and exemption is available to all)	30,000
Total Exemption	80,000

Case 2: Twins Are 6 Year Old And Son Three Years Old.
Computation of Taxable Leave Travel Concession u/s 10(5) for the Assessment Year 2020-21

Particulars	Amount (₹)
Cost of Travel
For the Spouse and Assessee himself	50,000
For Children – First Child is twin sons and Second Child is daughter (Then exemption is not available to daughter, as the twin sons are considered as Two Children). Hence exemption will be ₹ 30,000 × 2/3 = 20,000	20,000
Total Exemption	70,000

Note:
1. The Exemption will be available only for two surviving children of an individual born after 01.10.1998. There is no restriction for children born before 01.10.1998 and also in case of multiple births after one child.

Question 11.
Mr. Nambi, salaried employee furnishes the following details for the financial year 2020-21:

You are required to compute the income chargeable under the head salaries for the assessment year 2021-22 [May 2017, 8 Marks]
Answer:
Computation of Income chargeable under the head salaries of Mr. Nambi for the assessment year 2021-22

Note:
1. All payments paid by employer like Professional Tax paid by employer, Life Insurance Premium Paid by Employer, Credit card Fee, is obligation of employee paid by employer hence taxable (Except Health Insurance Premium paid by Employer )

Question 12.
Ms. Jaya is the marketing manager in XYZ Limited. She gives you the following particulars basic salary ₹ 65,000 pm
Dearness allowance ₹ 22,000 pm (30% is for retirement benefits)
Bonus ₹ 17,000 pm
Her employer has provided her with an accommodation on 1st April 2020 at a concessional rent. The house was taken on lease by XYZ Limited for ₹ 12,000 per month Ms. Jaya occupied the house from 1st November 2020. Company recovered ₹4,800 per month from the salary of Ms. Jaya.

The employer gave her a gift voucher of ₹ 8,000 on her birthday. She contributes 18% her salary (basic pay plus dearness allowance) towards recognised provident fund and the company contributes the same amount.

The company pays medical insurance premium to effect insurance on the health of Ms. Jaya ₹ 18,000.

Motor car owned by the employer (cubic capacity of engine exceeds 1.6 litre) provided to Ms. Jaya from 1st November 2020 which is used for both official and personal purposes. The motor car repair and running expenses of ₹ 50,000 were fully met by the company. The motor car was self-driven by the employee.

Compute the income chargeable to Tax under the head salaries in the hands of Ms. Jaya for the assessment year 2021-22
[Nov. 2017, 10 Marks]
Answer:
Computation of Income chargeable under the head salaries of Ms. Jaya 1 For the Assessment Year 2021-22

Particulars	Amount (₹)
Basic Salary [65000 × 12]	7,80,000
Dearness Allowance [22,000 × 12]	2,64,000
Bonus [17,000 × 12]	2,04,000
Value of Concessional Rent Accommodation (Working Note 1)	36,000
Gift Voucher on Birthday	8,000
Employer Contribution in Recognized Provident Fund (Working- Note 2)	51,552
Medical Insurance premium paid by Employer [Exempt u/s 17(2)]	Exempt
Motor Car (Working Note 3)	12,000
Gross Salary	13,55,552
Standard Deduction	50,000
Taxable Salary	13,05,552

Working Notes:
1. Value of Concessional Rent Accommodation (from 01.11.2020 to 31.03.2021)

• Salary for the purpose of Rent Free Unfurnished Accommodation
  Basic + Dearness Allowance + Bonus
  (65000 × 5) + (22000 × 5 × 30/100) + (17000 × 5) = 443000
• 15% of Salary = 66450
• Rent paid by Employer to Landlord = 12000 × 5 = 60000
• Rent Recovered from Ms. Jaya = 4800 × 5 = 24000
• Valuation of RFH = [15% of Salary or Actual Rent paid by Employer to Landlord whichever is less] – Rent Recovered from Ms. Jaya
  = [66450 or 60,000 whichever is less] – Rent Recovered from Ms. Jaya
  = 60,000 – 24000
  = 36000

2. Employer Contribution in Recognized Provident Fund

• Salary for the purpose of Recognized Provident Fund = 7,80,000 + 79,200 = 8,59,200
• Employer Contribution in RPF = 18% of 8,59,200 = 1,54,656
• Exempt to the extent = 12% of 8,59,200 = 1,03,104
• Taxable Amount = 1,54,656 – 1,03,104 = 51,552

3. Motor Car Valuation: (from 01.11.2020 to 31.03.2021)

• Motor Car is owned by Employer and Cubic Capacity is more than 1.6 Litre.
• Motor Car is used for both Official and Personal Purposes.
• Car is self-driven.
• Motor Car running and maintenance expenses paid by employer.
• Actual Expenses Incurred by the Employer = 50,000 (not relevant)
• Amount Taxable = @ 2,400 pm × 5 = 12,000

Question 13.
Mr Honey is working with a domestic company having a production unit in the USA for last 15 years. He has been regularly visiting India for export promotion of company’s product. He has been staying in India for at least 184 days every year.
He submits the following information:
Salary received outside India (for 6 months) ₹ 50,000 per month Salary received in India for 6 months ₹ 50,000 per month He has been given rent free accommodation in USA for which company pays ₹ 15,000 per month as Rent but when he comes to India, he stays in the guest house of the company. During this period he is given free lunch facility. During the previous year company incurred and expenditure of ₹ 48,000 on this facility.

He has been provided a car of 2000 cc capacity in USA which is used by him for both official and private purposes. The actual cost of the car is ₹ 8,00,000. But when he is in India the car is used by him and the members of his family only for personal purpose. The monthly expenditure of the car is ₹ 5,000 his elder son is studying in India for which his employee spends ₹ 12000 pa where as his younger son is studying in USA and stays in hostel for which Mr Honey get ₹ 3,000 per month as combined allowance. The company has taken an accident insurance policy and life insurance policy. During the previous year company paid premium of ₹ 5,000 and ₹ 10,000 respectively.

Compute Mr. Honeys taxable income from salary for the assessment year 2021-22. [Nov. 2013, 4 Marks]
Answer:
Computation of income chargeable under the head salaries of Mr. Honey for the assessment year 2021-22

Working Notes:

1. Rent Free House in USA:
   Salary for the purpose of RFH 600000 + 36000 = 636000
   Valuation of RFH = 15% of Salary or Actual Rent paid by Employer to Landlord whichever is less
   = 636000 × 15/100 or 15000 × 12
   = 95400 or 180000
   = 95400
2. Rent Free House in India:
   This accommodation is available for official purpose only hence not taxable.
3. Education Allowance:
   Educational facility of Education and Hostel to children outside India is fully taxable.
4. Accident Insurance – It is Exempt
5. Life Insurance – It is obligation of employee paid by employer and hence fully taxable.

Question 14.
Mr Janak Raj employed as General Manager in Rajus refractories Private Limited furnishes you the under mentioned information for the year ended 31.03.2021:

1. Basic salary up to 30.11.2020 70,000 per month
2. Basic salary from 01.12.2020 80,000 per month
3. Salary is due and paid on last day of every month
4. Dearness allowance @ 50% of basic salary (not forming part of salary for retirement benefits)
5. Bonus equal to one month salary (this was paid In November 2019 on basic salary plus dearness allowance applicable for that month)
6. Contribution of employer to recognized provident fund account of the employee @18% of basic salary. Employee also contributing and equal amount.
7. Professional tax paid ₹ 6,000 of which ₹ 3,000 was paid by employer.
8. Facility of laptop was provided to Mr. Janak Raj for both official and personal use. Cost of laptop ₹ 65,000 and was purchased by the company on 11.10.2020.
9. Leave travel concession given to Janak Raj, his wife and three children (one daughter age 6 and twin sons Age 4). Cost of air tickets economy class reimbursed by the employer ₹ 20,000 for adults and lump sum of ₹ 25,000 for 3 children)
10. Mr. Janak Raj is eligible for availing exemption this year to the extent, it is permissible under the Income Tax Act 1961.

Compute the taxable salary of Mr Janak Raj. [Nov. 2018,6 Marks]
Answer:
Computation of income chargeable under the head salaries of Mr. Honey for the assessment year 2021-22

Working Note:
1. The Exemption will be available only for two surviving children of an individual born after 01.10.1998. There is no restriction for children born before 01.10.1998 and also in case of multiple births after one child.

Question 15.
Examine with brief reasons whether the following are chargeable to Income tax and the amount liable to tax with reference to the provisions of the Income Tax Act 1961. Allowances received by an employee Mr Ram working in a transport system at ₹ 12,000 per month which has been granted to meet his personal expenditure while on duty. He is not in receipt of any daily allowance from his employer. [Nov. 2018, 2 Marks]
Answer:
Provision:

• If any fixed amount of allowance is given by the employer to the employee
• who is working in any transport system,
• to meet his personal expenditure
• during his duty performed in the course of running of such transport from one place to another place.
• Then the amount of exemption will be 70% of the allowance or @ 10000 pm whichever is less.

In this Case:

• Amount of Allowance = 12,000 pm
• Annual amount of allowance = 12,000 × 12 = 1,44,000
• 7096 of 1,44,000 = 1,00,800
• Limit amount = 10,000 × 12 = 1,20,000
• 7096 of 1,44,000 or 120000 whichever is less is exempt
  1,00,800 or 1,20,000
  1,00,800
• Taxable amount = 1,44,000 – 1,00,800 = 43,200

Agricultural Income – CA Inter Taxation Study Material is designed strictly as per the latest syllabus and exam pattern.

Agricultural Income – CA Inter Taxation Study Material

Question 1.
Discuss with brief reasons, whether Rent Received for letting out Agricultural Land for a Movie Shooting and Amounts Received from Sale of Seedlings in Nursery adjacent to the Agricultural Lands owned by an Assessee can be regarded as Agricultural Income, as per the provisions of the Income-tax Act, 1961. [May 2017, 4 Marks]
Answer:

Item	Treatment
Rent of Movie Shooting	It is not an Agricultural Income, since it is not Income derived “through Agriculture’’. This constitutes Rental Income for “non-agricultural purposes”.
Sale of Seedlings in Nursery	As such, Income from Sale of Plants and Seedlings grown in Pots in a Nursery constitutes Agricultural Income as per decision in Soundarya Nursery 241 ITR 530 (Mad). However, in this case, such Income is derived not from agricultural land, but from a Nursery “adjacent” to it. Hence, it does not constitute Agricultural Income.

Question 2.
X Limited, grows sugarcane to manufacture sugar. The data for the Previous Year 2020-21 is as follows –

S.No.	Particulars	Amount(₹)
1	Particulars Cost of Cultivation of Sugarcane	6,00,000
2	Market Value of Sugarcane when transferred to Factory	10,00,000
3	Other Manufacturing Cost	6,00,000
4	Sales of Sugar	25,00,000
5	Salary of Managing Director who looks after all operations of the Company	3,00,000

Determine the Income of the Company [Modified]
Answer:
Computation of Total Income of X limited for the Assessment Year 2021-22

Particulars	Amount(₹)	Amount(₹)
1. Profit and Gains of Business or Profession
Sale of Sugar		25,00,000
Less: Average Market Value of Sugarcane	10,00,000
Salary to Managing Director	3,00,000
Manufacturing Cost	6,00,000	(19,00,000)
Business Income		6,00,000
2. Computation of Agricultural Income		10,00,000
Market Value of Sugarcane		10,00,000
Less: Cost of Cultivation		(6,00,000)
Agricultural Income		4,00,000

Question 3.
Mr. Avani, a resident aged 25 years, manufactures tea leaves from the tea plants grown by him in India. These are then sold in the Indian Market for ₹ 40 lakhs. The cost of growing tea plants was ₹ 15 lakhs and the cost of manufacturing tea leaves was ₹ 10 lakhs. Computer her Tax Liability the Assessment Year 2021-2022. [May 2018, 4 Marks]
Answer:

Particulars	Amount (₹)
Sale Value of Tea	40,00,000
Less : Cost of growing Tea Plant	(15,00,000)
Less : Cost of Manufacturing Tea	(10,00,000)
Business Income (before Rule 8)	15,00,000
Less : Agricultural Income (60% Exempted as per Rule 8)	(9,00,000)
Taxable Business Income	6,00,000

Step	Particulars (Tax Liability)	Amount (₹)
1	Agricultural Income + Total Income – ₹ 9,00,000 – ₹ 6,00,000	15,00,000
2	Tax on Step 1 [1,12,500 + (15,00,000-10,00,000) 30%]	2,62,500
3	Agricultural Income + Basic Exemption = ₹ 9,00,000 + ₹ 2,50,000	11,50,000
4	Rebate for Agricultural Income = Tax on Step 3 = [₹ 1,12,500 + (11,50,000 – ₹ 10,00,000)]	1,57,500
5	Net Tax Payable = (Step 2 – Step 4)	1,05,000
6	SHEC @ 4% of ₹ 1,05,000	4,200
7	Net Tax Payable	1,09,200

Question 4.
The following is the P&L for the year ended 31.03.2021 of western Sugar Mills, of which Shir Daga is the owner

Compute the Income from Business Shri Daga from the Sugar Mill for the Assessment Year 2021-2022 after taking the following information into consideration.

(a) Sale Proceeds of Cane include ₹ 5,32,000 on account of Cane pro-duced and consumed in the Factory, and debited to Manufacturing Expenses, the Average Market Price of such Cane being ₹ 6,00,000.
(b) The Motor Truck sold during the year for ₹ 7,2230 was purchased in
the past for ₹ 19,000. Depreciation claimed in respect thereof in past assessment was ₹ 15,000.)
(c) General Charge include – (a) ₹ 2,000 being the legal expenses incurred in defending a suit regarding the Company’s title to certain agricul-tural lands, and (b) ₹ 10,000 paid to Daga’s son who is an employee in the Sugar Mill, for a trip to Hawaii to study modern methods of manufacture.
(d) Depreciation in respect of all assets has been ascertained at ₹ 50,000 as per Income Tax Rules. [Nov. 1998, 14 Marks]
Answer:
Computation of Profits and Gains of Business or Profession

Working Notes :

1. Adjustment in respect of Average Market Price: Under Rule 7, where Agricultural Produce is used as a Raw Material, the Average Market Price of the Agricultural Produce so consumed shall be debited to the Manufacturing A/c. No other expenditure relating to agricultural activity shall be considered. The adjustment for this item is as under –

Particulars	Amount (₹)
Average Market Price of Agricultural Produce consumed	6,00,000
Less: Amount already debited as Manufacturing Expenses	5,32,000
Balance to be debited = Deduction from Net Profit	68,000

2. Computation of Short-term Capital Gain:

Particulars	Amount (₹)
Cost of Motor Truck	19,000
Less: Depreciation	15,000
Written Down Value	4,000
Less : Sale Value	7,230
Short Term Capital Gains [Sale value ₹ 7,230 – WDV ₹ 4,000]	3,230

3. Expenditure relating to Mr. Dag&s son, who is an Employee, is incurred for the purpose business and no portion of the expenditure is considered to be excessive u/s 40A(2). Hence, it is fully allowed as a deduction.

Incomes Which Do Not Form Part of Total Income – CA Inter Tax Study Material is designed strictly as per the latest syllabus and exam pattern.

Incomes Which Do Not Form Part of Total Income – CA Inter Taxation Study Material

Introduction

Question 1.
State with reason, whether the following statement is true or false with regard to the provisions of the Income-tax Act, 1961 for the Assessment year 2021-22.
(a) Compensation on account of disaster received from local authority by an individual or his/her legal heir is taxable. [Nov. 2008, 2 Marks]
Answer:
The statement is False

Section	Explanation
10(10BC)	If any amount received or receivable from the Central Govern­ment or State Government or Local Authority by an Individual or his/her legal heir by way of compensation on account of any disaster shall be exempt. If such amount to the extent allowed as a deduction under this Act on account of any loss or damage caused by such disaster shall not be exempt.

Question 2.
State with reason, whether the following statement is True or False:
(a) Mr. P, a shareholder of a closely held company, holding 16% shares, received advances from that company which is to be deemed as dividend from an Indian Company, hence exempted under Section 10(34) of the Income-tax Act, 1961. [May 2009, 2 Marks]
Answer:
The statement is False

Section	Explanation
2(22)	Any payment by a closely held company bv way of advance or loan to a shareholder being a person who is the beneficial own­er of shares, having at least 10% of the voting power or to any concern in which such shareholder is a member or a partner and in which he has substantial interest.
2(22)(e)	Taxation of Dividend will be treated as under: Tax shall be deducted at source Gross amount shall be included in the income of a person receiving it. It is not govern by section 115-0.
Case	Statement is False. Mr. P will have to pay tax and it is chargeable.

Question 3.
Discuss with reason, whether the following statements are true or false, as per the provisions of the Income-tax Act, 1961:
(a) Any amount received by an individual or his legal heir as compensation for natural disaster from the Government, is taxable.
(b) Dividend received (on which no Dividend Distribution Tax has been paid) by a dealer in shares or one engaged in buying/selling of shares, is chargeable under the head “Income from other sources” [May 2016, 4 Marks]
Answer:
(a) The Statement is False.

Section	Explanation
10(10BC)	If any amount received or receivable from the Central Govern­ment or State Government or Local Authority by an Individual or his/her legal heir by way of compensation on account of any disaster shall be exempt. If such amount to the extent allowed as a deduction under this Act on account of any loss or damage caused by such disaster shall not be exempt.

(b) The Statement is True
This Dividend is chargeable to tax.

Section	Explanation
2(22)	Any payment by a closely held company bv way of advance or loan to a shareholder being a person who is the beneficial own­er of shares, having at least 10% of the voting power or to any concern in which such shareholder is a member or a partner and in which he has substantial interest.
2(22)(e)	Taxation of Dividend will be treated as under: Tax shall be deducted at source Gross amount shall be included in the income of a person receiving it. It is not govern by section 115-0.
Case	Statement is False. Mr. P will have to pay tax and it is chargeable.

Question 4.
Which income of Sikkimese individual is exempted from tax under Section 10(26AAA) ? [Nov. 2010, 4 Marks]
Answer:

• Income of a Sikkimese Individual which accrues or arise to him/her from any source in the State of Sikkim or Income from Dividend/ Interest on Securities from anywhere in the world is exempt.
• If Sikkimese woman who on or after April 1,2008, marries a non-Sikkimese individual then exemption is not available.

Question 5.
Briefly explain the exemption available under section 10(48) of the Income-tax Act, 1961 in respect of income received by certain foreign companies from sale of crude oil. [Nov. 2013, 4 Marks]
Answer:

• Any income received in India in Indian currency by a foreign company I on account of sale of crude Oil
• Any other goods or rendering of services as may be notified by the j Central Government in this behalf.
• To any person in India shall be exempt subject the following conditions being satisfied.
  • the receipt of money in India by the foreign company is pursuant to an agreement or an arrangement which is either entered into by the central Government or approved by it.
  • The foreign company and the arrangement or agreement has been notified by the Central Government in this behalf having regard to the national interest.
  • the receipt of money is the only activity carried out by the foreign company in India.

AGRICULTURAL INCOME

Question 6.
Discuss with brief reasons, whether rent received for letting out ; agricultural land for a movie shooting and amounts received from sale of seedlings in a nursery adjacent to the agricultural lands owned by an assessee can be regard as agricultural income, as per the provisions of the Income-tax Act, 1961. [May 2017, 4 Marks]
Answer:

Particulars in Qs.	Provisions	Case
Letting out agricul­tural land for a movie shooting	As per section 2(1 A)(a) any in­come by way of rent, which is derived from Agricultural Land providing the land for agricultur­al purpose, is agricultural income.	The land is used for a movie shooting hence it is not the agricultur­al income.
Amounts received from sale of seedlings inanursery adjacent to the agricultural lands ownedbyan assessee	As per section 2( 1 A) if agricultur­al land is used for seedling grown or saplings in nursery then it is treated as agricultural income. The land is used for nursery for seedlings and subsequently by selling it. It is created as agricul­tural Income.	The land is used for a nursery for seedlings and subsequently by selling it. It is created as agricultural In­come.

Question 7.
Answer the following with reference to the provisions of the Income- tax Act, 1961 for the assessment year 2020-21:
(a) Whether the income derived from saplings or seedlings grown in a nursery is taxable under the Income-tax Act, 1961? [May 2009, 2 Marks]
Answer
Section – 2(1 A)

Explanation :
It is agricultural income. Income derived from seedlings or saplings grown in nursery will be deemed to be agricultural income and exempt from tax.

Question 8.
State with brief reasoning whether the following receipts are chargeable to income-tax or are exempt (if chargeable, the amount taxable is to be mentioned) for the assessment year 2021-22:

Nature of Receipt	Amount (₹)
Interest on enhanced compensation received on 12-3-2021 for acquisition of urban land, of which 40% relates to the earlier year,	96,000
Rent received for letting out agricultural land for a movie shooting.	72,000

Computation is not required. [Nov. 2013, 4 Marks]
Answer:
Interest on enhanced compensation received on 12-3-2021 for acquisition of urban land, of which 40% relates to the earlier year.

Rent received for letting out agricultural land for a movie shooting.

Question 9.
Mr. Tenzingh is engaged in composite business of growing and curing (further processing) Coffee in Coorg, Karnataka. The whole of coffee grown in his plantation is cured. Relevant information pertaining to the year ended 31.3.2021 are given below :

Besides being used for agricultural operations, the car is also used for personal use: disallowance for personal use may be taken at 20%. The expenses incurred for car running and maintenance are ₹ 50,000. The machines were used in coffee curing business operations.
Compute the income arising from the above activities for the assessment year 2021-22. Show the WDV of the assets as on 31.3.2021. [May 2010, 6 Marks]
Answer:
Rule – 7B

Explanation :

• Income derived from the sale of coffee grown and cured by the seller in India shall be computed as if it were income derived from business, and
• Twenty five per cent of such income shall be deemed to be income liable to tax.
• Seventy five per cent of such income shall be agricultural Income.

Computation of Income of Mr. Tenzingh for the Assessment Year 2021-22

Particulars	Amount (₹)	Amount (₹)
(A) Sale of Cured Coffee		22,00,000
Expensed on growing the Coffee	3,10,000
Expenditure for curing the Coffee	3,00,000
Car Expenses 80% of ₹ 50,000	40,000
Depreciation of Car [3,00,000 × 15% × 80% = 36,000]	36,000
Depreciation of Machinery [15,00,000 × 15% = 2,25,000]	2,25,000
(B) Total Expenses for Growing and Curing the Coffee	9,11,000	9,11,000
(C) Net Profit (A) – (B)		12,89,000
Business Income 25% of ₹ 12,89,000		3,22,250
Agricultural Income 75% of ₹ 12,89,000		9,66,750

Computation of Written Down Value of Car and Machinery on 31.03.2021

Car:
Written Down of Car on 01.04.2020		3,00,000
Less: Depreciation of Car [3,00,000 × 15% × 80% = 36,000]		36,000
Written Down of Car on 31.03.2021		2,64,000
Machinery:
Written Down of Car on 01.04.2020		15,00,000
Less: Depreciation of Machinery [15,00,000 × 15%) = 2,25,000]		2,25,000
Written Down of Car on 31.03.2021		12,75,000

Sez Questions

Question 10.
Nathan Aviation Ltd. is running two industrial undertakings, one in a SEZ (Unit S) and another in a normal area (Unit N). The brief summarized details for the year ended 31-3-2021 are as under:

Particulars	S (₹ In Lacs)	N (₹ In Lacs)
Domestic Turnover	10	100
Export Turnover	120	NIL
Gross Profit	20	10
Less: Expenses and Depreciation	7	6
Profits derived from the Unit	13	4

The brought forward business loss pertaining to Unit N is ₹ 2 lacs. Briefly compute the business income of the assessee. [Similar Type Nov. 2013, 4 Marks\ [Nov. 2015, 8 Marks]
Answer:

Particulars	Unit S (2 In Lacs)	Unit N (2 In Lacs)
Profits derived from the Unit	13	4
Less: Exemption Under Section 10AA	12	ML
Profit from Unit S × Export Turnover of Unit S/Total Turnover of Unit S 13 × 120/130 = 12
Taxable Profit	1	4
Less: brought forward losses of Unit N	NIL	2
Business Income	1	2
Therefore the Total Business Income of Nathan Aviation Ltd. is [ 1+2 ]	3

Note: It is assumed that the above financial year 2020-21 falls within the first five years period commencing from the year of manufacture or production of articles or provision of service by Unit S.

Question 11.
Rudra Ltd. has one unit at Special Economic Zone (SEZ) and other unit at Domestic Tariff Area (DTA), the company provides the following details for the previous year 2020-21.

Particulars	Rudra Ltd. (₹)	Unit in DTA (₹)
Total Sales	6,00,00,000	2,00,00,000
Export Sales	4,60,00,000	1,60,00,000
Net Profit	80,00,000	20,00,000

Calculate the eligible deduction under section 10AA of the Income-tax Act, 1961, for the Assessment Year 2021-22, in the following situations:
(a) If both the units were set-up and start manufacturing from 22-05-2015.
(b) If both the units were set-up and start manufacturing from 14-05-2019, [May 2015, 08 Marks]
Answer:

Note:

1. No deduction is available for Unit in Domestic Tariff Area as it is not covered u/s 10AA.
2. SEZ profits are computed as Total for Rudra Ltd. less amount for Unit in DTA.

Question 12.
Mr. Suresh has set-up an undertaking in SEZ (Unit A) and another undertaking in DTA (Unit B) in the financial year 2016-17. In the previous year 2020-21, total turnover of the unit A is ₹ 180 Lacs and total turnover of Unit B is ₹ 120 Lacs. Export turnover of Unit A for the year is ₹ 150 Lacs and the profit for the unit A is ₹ 60 Lacs.

Calculate the deduction available, if any, to Mr. Suresh under Section 10AA of the Income-tax Act, 1961, for the Assessment year 2021-22, if the manufacturing started in Unit A in the financial year 2016-17. [May 2016, 4 Marks]
Answer:
Computation of Business Income for the Assessment Year 2021-2022

Particulars	Amount (₹ in Lacs)
Profits from the unit A in SEZ	60
Less: Exemption u/s 10AA = Profit of Business of the Undertaking × Export Turnover/Total Turnover = 60 × \(\frac{150 \times 50 \%}{150+30}\)	25
Business Income	35

Note: Since Unit A has been set-up in Financial Year 2016-17, it falls within second 5 year period, for which exemption is 50%.

Question 13.
Mr. Kamal grows paddy and uses the same for the purpose of manufacturing of rice in his own Rice Mill. The cost of cultivation of 40% of paddy produce is ₹ 7,00,000 which is sold for ₹ 15,00,000; and the cost of cultivation of balance 60% of paddy is ₹ 12,00,000 and the market value of such paddy is ₹ 24,00,000. To manufacture the rice, he incurred ₹ 2,00,000 in the manufacturing process on the balance (60%) paddy. The rice was sold for ₹ 30,00,000.
Compute the Business income and Agriculture Income of Mr. Kamal. [Nov. 2016, 4 Marks]
Answer:
Computation of Business Income and Agricultural Income of Mr. Kamal

Question 14.
Mr. Avans, a resident aged 25 years, manufactures tea leaves from the tea plants grown by him in India, These are then sold in the Indian market for ₹ 40 lakhs. The cost of growing tea plants was ₹ 15 lakhs and the cost of manufacturing tea leaves was ₹ 10 lakhs.
Compute her tax liability for the Assessment Year 2021-22. [May 2018, 7 Marks]
Answer:
Computation, of Taxable Income of Mr. Avani for Assessment Year 2021-20

Particulars	Amount (₹)	Amount (₹)
Sale Value of Tea		40,00,000
Less: Cost of Growing tea Plant	15,00,000
Less: Cost Manufacturing Tea	10,00,000	25,00,000
Business Income		15,00,000
Less: Agricultural Income 60% of ₹ 15,00,000 is Exempt under Rule 8		9,00,000
Business Income		6,00,000

Computation of Tax Liability

Particulars	Amount (₹)	Amount (₹)
Agricultural income		9,00,000
Business Income		6,00,000
Total Income		15,00,000
Tax on total income of ₹ 15,00,000 [A]		2,62,500
Agricultural Income		9,00,000
Exemption Limit		2,50,000
Total		11,50,000
Tax on ₹ 11,50,000 [B]		1,57,500
Difference [A] – [B]		1,05,000
Add: SHEC @4% of ₹ 1,05,000		4,200
Net Tax Liability		1,09,200

Question 15.
Mrs. Vibha Gupta, a resident individual, is running a SEZ unit, as well as a unit in Domestic Tariff Area (DTA), She furnishes the following details relating to the year ended 31-3-2021, pertaining to these two units ₹ in lakhs.

Particulars	DTA Unit	SEZ Unit
Export Turnover	100	1000
Total Turnover	400	1100
Net Profit	50	220

Calculate the eligible deduction under section 10AA of the Income-tax Act, 1961, for the Assessment Year 2021-22, in the following situations:
(a) If both the units were set-up and start manufacturing from 12-03-2013.
(b) If both the units were set-up and start manufacturing from 12-08- 2018. [Nov. 2018, 6 Marks]
Answer:

Note:
1. No deduction is available for Unit in Domestic Tariff Area as it is not covered u/s 10AA.

Provision for Filing of Return of Income and Self-Assessment – CA Inter Taxation Study Material is designed strictly as per the latest syllabus and exam pattern.

Provision for Filing of Return of Income and Self-Assessment – CA Inter Taxation Study Material

Question 1.
Answer the following with reference to the provisions of the Income-tax Act, 1961 for the assessment year 2021-22:
When will tax not required to be deducted at source on interest payable to a resident on any bond or security issued by a company though the aggregate amount of interest exceeds ₹ 5,000, the basic exemption limit under Section 193 of the Act? [May 2009, 2 Marks]
Answer:

Section	Explanation
197A	If a Declaration is Submitted by a Resident Individual along with his PAN on Form No. 15G (15H for Senior Citizen aged 60 years or more) in duplicate that his total income does not exceed minimum exemption limit. The tax will not be deducted at source on any land or security issued by a company, even when interest payable exceeds ₹ 5,000/- in a year.

Question 2.
Answer the following with regard to the provisions of the Income-tax Act, 1961 for the assessment year 2021-22:
Enlist the instalments of advance tax and due dates thereon in case of Companies. [May 2009, 4 Marks]
Answer:
Due dates for instalments of payment of Tax by companies are as follows :

Instalment	Due Dates	Percentage of Total Tax Payable
1	Upto 15th June	15%
2	Upto 15th September	45% (including already paid)
3	Upto 15th December	75% – do –
4	Upto 15th March	100% – do –

Question 3.
Explain the consequences of failure to deduct tax at source and pay-ment of the same to the Government A/c under Income-tax Act, 1961 [Nov. 2009, 3 Marks]
Answer:

Section	Explanation
201	When a person fails to deduct tax at source and or not depositing such amount in Government Account, he shall be treated as deemed assessee in default. As such he will be liable to pay tax along with interest. Further under law he may also face prosecution and or to pay penalty.
40(a)	Such payment will be disallowed as expenditure u/s 40(a).

Question 4.
Explain the consequences of not deducting tax and paying to Govt, account under Section 201 of the Income-tax Act, 1961. [Nov. 2010, 4 Marks]

Section	Explanation
201	When a person fails to deduct tax at source and or not depositing such amount in Government Account, he shall be treated as deemed assessee in default. As such he will be liable to pay tax along with interest. Further under law he may also face prosecution and or to pay penalty.
40(a)	Such payment will be disallowed as expenditure u/s 40(a).

Question 5.
Briefly discuss the provisions relating to payment of advance tax in case of capital gains and casual income. [May 2013, 4 Marks]
Answer:
Advance Tax is payable on all incomes including Capital Gains and casual Incomes. But these incomes are not regular and so cannot be estimated by the assessee in advance, before due dates for advance payment instalments. Most of casual Income items are such where tax is deducted at source; same is the case in few items where capital gain may arise.

But after arise of capital gain and casual income, the assessee is required to calculate whether any amount of advance tax payable is still due after taking into account tax deducted at sources. If it is so, the due amount can be deposited in next instalment and finally before 31st March.

Question 6.
Who is liable to pay Advance Tax? What is the procedure to compute the advance tax payable ? [May 2014, 4 Marks]
Answer:
Every such person is liable to pay advance tax whose tax liability is ₹ 10,000/- or more after estimating his taxable income for whole previous year at the rates applicable and amount of total estimated tax payable, is paid as advance tax in instalments after considering tax deducted at source, if any. Advance tax is payable in 4 instalments (15th June, 15th September, 15th December and 15th March). Balance, if any upto 31st March.

Question 7.
1. Explain briefly the provisions of advance tax on capital gains and casual income.
2. What are the consequences of failure to deduct or pay the tax under Section 201 of the Income-tax Act, 1961? [Nov. 2015, 4+4 Marks]
Answer:

S.No.	Explanation
1	Every such person is liable to pay advance tax whose estimated tax liability is ₹ 10,000/- or more for whole previous year at the rates applicable. Advance tax is payable in instalments after considering tax deducted at source, if any Advance tax is payable in 4 instalments (15th June, 15th September, 15th December and 15th March). Balance, if any upto 31st March.
2	When a person fails to deduct tax at source and or not depositing such amount in Government Account, he shall be treated as deemed assessee in default. As such he will be liable to pay tax along with interest, further under law he may also face prosecution and or to pay penalty. Such payment will be disallowed as expenditure u/s 40(a).

Question 8.
Briefly discuss the provisions of Section 234B of the Income-tax Act, 1961 for short-payment or non-payment of advance tax. [May 2016, 4 Marks]
Answer:

Section	Explanation
234B	According to provisions of section 234B, non-payment of Advance tax or payment of advance tax less than 90% of due, will attract interest @1% per month or part of the month w.e.f. 1st April following to date of assessment. The amount of not-paid or less-paid will be calculated after deduction of tax at source.

Question 9.
Discuss the provision under Income-tax Act for Payment of Advance Tax in case of Capital Gain. [Nov. 2016, 2 Marks]
Answer:

Section	Explanation
234C	Since Capital Gain cannot be estimated in advance, the amount of tax on capital gain is payable in following instalments of advance tax after arise of capital gain. If no payable instalment remains, the advance tax can be deposited upto 31st March. There will be no interest liability u/s 234C, if advance tax is deposited in the above manner.

Question 10.
Discuss the provisions, relating to the premature withdrawal from Employees Provident Fund, under Section 192A, for Assessment Year 2021-22. [Nov. 2016, 4 Marks]
Answer:

Section

Explanation

192A

Premature withdrawal from Recognized Provident Fund by an employee before 5 years services attracts TDS @ 10% if such payment is ₹ 50,000/- or more. The employee has to furnish his PAN, otherwise tax will be deducted at maximum slab rate. In case of foreign employee surcharge and cess will also be deducted, if applicable. However if there is change in employment and the accumulated balance is transferred to new employee there will be no TDS. Further if discontinuous of service before completion of 5 year is due to termination, ill health, closure of business and like there will be no TDS.

Question 11.
What are the clarifications made by CBDT with respect to Section 206C(1F) relating to following issues:
1. Whether TCS on sale of motor vehicle is applicable only to luxury car?
2. Whether TCS is applicable on each sale or aggregate value of sale of Motor Vehicle, exceeding ₹10 Lakhs?
3. Whether TCS is applicable in case of an individual?
4. Whether TCS on sale of motor vehicle is at retail level also or only by manufacturer to distributor or dealer? [Nov. 2019, 4 Marks]
Answer:

Section

Explanation

206C

Provisions for tax collection at source (TCS) are applicable under section 206C as follows: 1. TCS on sale of Motor Vehicle is applicable when amount of sale consideration is more than ₹ 10 lacs to all not necessarily luxury car. 2. TCS is applicable on each sale of Motor ‘vehicle exceeding ₹ 10 lacs @ 0.75%. 3. TCS is applicable to all buyers, except Central/State Government, embassy / High Corn mission, representative of foreign Government, etc. 4. TCS is applicable only in retail transitions. It is not applicable on Sale of Motor Vehicles by manufactures to dealers or distributors.

Question 12.
During the financial year 2020-21, the following payments/expendi-ture were made/incurred by Mr. Yuvan Raja, a resident individual (whose turnover during the year ended 31-3-2020 was ₹ 39,00,000) :

1. Interest of ₹ 12,000 was paid to Rehman & Co., a resident partnership firm, without deduction of tax at source.
2. Interest of ₹ 4,000 was paid as interest to Mr. RD. Burman, a non-resident, without deduction of tax at source.
3. He had sold goods worth ₹ 5,00,000 to Mr. Deva. He gave Mr. Deva a cash discount of ₹ 12,000 later. Commission of ₹ 15,000 was paid to Mr. Vidyasagar on 2.7.2020. In none of these transactions, tax was deducted at source.

Briefly discuss whether any disallowance arises under the provisions of Section 40(a)(i)/40(a)(ia) of the Income-tax Act, 1961. [May 2011, 4 Marks]
Answer:
The assessee is a resident individual and his annual turnover is 39 lacs, which is less than ₹ 1 Crore, during immediately preceding previous year. Hence he was not under tax audit purview under Section 44AB.

Section	Explanation
40(a)(i)	Since assessee was not subject to tax audit in preceding previous year, payment of interest ₹ 12,000/- to Rehman & Co. does not attract provisions of disallowance.
40(a)(i)	Interest of ₹ 4,000/- paid to Mr. R. D. Burman, a non-resident, without deduction of tax at source, will attract disallowance.
40(a)(i)	Commission of ₹ 15,000/- paid to Mr. Vidyasagar is not subject to disallowance under Section 40(a)(z) because assessee was not under tax audit.

Question 13.
State the applicability of TDS provisions and TDS amount in the following cases:
(a) Rent paid for hire of machinery by B Ltd. to Mr. Raman ₹ 2,10,000
(b) Fee paid to Dr. Srivatsan by Sundar (HUF) ₹ 35,000 for surgery per-formed to a member of the family. [Nov. 2011, 4 Marks]
Answer:

S. No.	Explanation
(a)	Rent paid ₹ 2,10,000/- for hire of machinery exceeds ₹ 1,80,000/-, hence provisions of Section 194-1 for deduction of tax at source will apply. If buyer has furnished PAN, the TDS will be @ 1.5% of ₹ 2,10,000/-. ie. ₹ 3,150/- otherwise 20%.
(b)	Fee paid to Dr. Srivatsan ₹ 35,000/- for personal surgery of a member of HUF is not subject to deduction of tax at source.

Question 14.
What are the provisions relating to tax deduction at source in respect of:
1. ABC and Co. Ltd. Paid ₹ 19,000 to one of its Directors as sitting fees on 01.01.2021.
2. Mr. X sold his House to Mr. Y on 01.02.2021 for ₹ 60,00,000? [May 2014, 2 + 2 = 4 Marks]
Answer:

S. No.	Explanation
(a)	TDS @ 7.5% is to be deducted on ₹ 19,000/- paid to a Director by the company under Section 194J.
(b)	TDS @ 0.75% is to be deducted on ₹ 60 lacs under Section 194IA.

Question 15.
State in brief the applicability of tax deduction at source provisions, the rate and amount of tax deduction in the following cases for financial year 2020-21:

1. Payment of ₹ 27,000 made to Jacques Kallis, a South Asia cricketer, by an Indian newspaper agency on 02.07.2020 for contribution of articles in relation to the sport of cricket.
2. Rent of ₹ 1,70,000 paid by a partnership firm for use of plant and machinery.
3. Winning from horse race ₹ 1,50,000.
4. ₹ 2,00,000 paId to Mr. A, a resident individual on 22.02.2021 by the State of Uttar Pradesh on compulsory acquisition of his urban land. [Nov. 2014, 4 Marks]

Answer:

S. No.	Explanation
(a)	Payment of ₹ 27,000/- to a non-resident Cricketer is liable for TDS @ 2096 plus surcharge and less under Section 194E. Hence amount of tax is ₹ 27000 × 2096 = 5400 + 496 cess = 5616
(b)	Rent ₹ 1,70,000/- for use of plant and machinery is not subject to TDS, because it does not exceed ₹ 1,80,000/- under Section 194-1.
(c)	Winning from horse race ₹ 1,50,000/- is subject to TDS @ 30%, because it exceeds ₹ 10,000/-, under Section 194BB. Amount of TDS is ₹ 1,50,000 × 3096 = ₹ 45,000
(d)	Amount paid on compulsory acquisition of urban land is subject to TDS @ 7.596 under Section 194LA provided such payment exceeds ₹ 2.5 lacs. In the instant case the amount is ₹ 2 lacs, hence there is no TDS.

Question 16.
Mr. Madan sold his house property in Surat as well as his rural ag-ricultural land for a consideration of ₹ 65,00,000 and ₹ 20,00,000 respec-tively, to Mr. Raman on 01.10.2020. He has purchased the house property 1 for ₹ 40,00,000 and the land for ₹ 15,00,000, in the year 2015. There was no difference in the stamp valuation. You are required to determine TDS implications, if any, assuming both persons Resident Indians. [May 2015, 4 Marks]
Answer:

1. TDS is applicable on Sale Consideration of house property ₹ 65 lacs @ 0.7596 i.e. ₹ 48,750 (TDS).
2. TDS is not applicable on sale of agricultural land ₹ 20 lacs.

Question 17.
Ashwin a resident Individual carrying on business, furnishes you the following information:

Turnover During the Financial Year	Amount (₹)
2019-2020	2,20,00,000
2020-2021	20,00,000

State whether tax deduction at source provisions are attracted for the under mentioned expenses incurred during the financial year 2020-21

Particulars	Amount (₹)
Commission paid to Babloo	8,500
Payment to Vijay for repair of office building	23,000
Payment of fees for technical services, to Vivek	35,000

All payments are made to residents. If tax has to be deducted at source, state the amount of tax to be deducted at source. [May 2016, 4 Marks]
Answer:
The turnover of Mr. Ashwin for preceding previous year is ₹ 220 lacs which exceeds 100 lacs, hence in tax audit under Section 44 AB. Accordingly normal provisions of TDS will apply as under :

1. Commission paid to Babloo is under Section 194H, according to which 3.7596 TDS is applicable when amount of commission exceeds ₹ 15,000/-. In the instant case amount of commission paid is ₹ 8,500/- (below applicable limit of ₹ 15,000/-). Hence no TDS is applicable.
2. Payment for repair of office building is eligible for TDS @ 0.75% under Section 194C if payment exceeds ₹ 30,000/-. In the instant case the amount paid is ₹ 23,000/- (less than ₹ 30,000/-) hence no TDS is applicable.
3. Payment of fees for technical services amounting to ₹ 35,000/- is eligi-ble for TDS @ 7.5% under Section 194J, because the amount exceeds non-TDS limit of ₹ 30,000/-.

Question 18.
State with reason whether the following receipt is taxable or not under the provision of Income-tax Act, 1961? “TDS is not applicable in respect of payment of ₹ 1,00,000 to Mr. Pandey a resident, being interest on recurring deposit with SBI” [Nov. 2016, 2 Marks]
Answer:
Interest on recurring deposit with SBI ? one lac is to be included in Income from other Sources as taxable. It is also subject to TDS @ 7.5% under Section 194A because amount of interest exceeds ₹ 10,000/-.

Question 19.
Mr. Barun provides you the following information and requests you to determine the Advance Tax liability with due dates for the financial year 2020-21.
Estimated tax liability for the financial year 2020-21 ₹ 65,000
Tax deducted at source for this year ₹ 5,000 [Nov. 2016, 4 Marks]
Answer:
Amount payable as Advance Tax :

Particular	Amount (₹)
Estimated Tax liability	65,000
Minus Tax Deducted at Source	5,000
Net Advance Tax Payable	60,000

It will be paid in the following manner:-

Instalment	Due Date.	Advance Tax Payable	Amount of
1	On or before 15 th June	15% of Total 60,000	9,000
2	On or before 15 th September	45% of Total 60,000 minus already paid (27,000 – 9,000)	18,000
3	On or before 15 th December	75% of Total 60,000 minus already paid (45,000 – 27,000)	18,000
4	On or before 15 th March	100% of Total 60,000 minus already paid (60,000 – 45,000)	15,000
Total			60,000

Note: Advance Tax is payable when estimated tax liability is ₹ 10,000/- or more.

Question 20.
Pallavi Bank Ltd., has paid interest of ₹ 9,000 to Mr. A, a resident Indian, from its Chennai branch and ₹ 8,000 from Bangalore branch. If there is no core banking services in the bank, is tax required to be deducted at source from such interest payments made on 31.3.2021? Will your y answer be different if there is core banking service present in the bank? Also, explain the provisions of the Income-tax Act, 1961 in this regard. [May 2017, 4 Marks]
Answer:
If there is no core banking services in the bank, no TDS is applicable, because interest amount is less than 10,000 in each branch separately. However, if core banking persists, TDS @ 7.5% is applicable on total interest ₹ 17,000/- (9,000 + 8000).

Question 21.
Mr. Sachal, a resident individual aged 54, furnishes income details as under:

1. Wholesale Cloth business, whose turnover is ₹ 1,50,00,000, for which accounts are audited u/s. 44AB. Income from such business ₹ 8,10,000.
2. Income from other sources ₹ 2,70,000.
3. Tax deducted at source ₹ 25,000.
4. Advance tax paid ₹ 1,03,000 on 14-3-2021.

Return of income will be filed on 11.12.2021. The assessee is willing to pay the requisite self-assessment tax. Calculate the interest payable under Section 234B of the Income-tax Act, 1961. Assume that the return of income would be processed on the same day of filing of return. [May 2017, 4 Marks]
Answer:
Computation of Taxable Income and Amount of Tax of Mr. Sachal:

Income from Business	8,10,000
Income from other sources	2,70,000
Total Income	10,80,000

Computation of Tax at existing rates :

Particulars	Amount (₹)	Rate	Amount (₹)
On First	2,50,000	Nil	Nil
On Next	2,50,000	5%	12,500
On Next	5,00,000	20%	1,00,000
On Balance	80,000	30%	24,000
	10,80,000		1,36,500
Add : 4% Less			5,460
Total Tax			1,41,960
Less: Tax deducted at Source			25,000
Total Tax Payable			1,16,960
90% of Total Tax Payable			1,05,264
Advance Tax paid			1,03,000 (Below 90%)
Advance Tax Less paid (1,16,960- 1,03,000)			13,960

Interest Payable under Section 234B @ 1% per month or part of the month from following 1st April to 11th December presumed date of assessment ie. 9months = 13,960× 1/100×9= 1256.40 (Rounded 1260) under Section 234B.

Important Note :

According to Finance Act, 2020, there are concessional alternate tax rate in which certain exemptions and deductions are not allowed. Since Mr. Sachal is not claiming any exemption/deduction, his total tax liability will be as under:

Particulars	Amount (₹)	Rate	Amount (₹)
On First	2,50,000	Nil	Nil
On Next	2,50,000	5%	12,500
On Next	2,50,000	10%	25,000
On Next	2,50,000	15%	37,500
On Balance	80,000	20%	16,000
	10,80,000		91,000

Particulars	Amount (₹)	Rate	Amount (₹)
Add : 4% Less			3,640
Total Tax			94,640

If this tax structure is adopted, then amount of Advance Tax paid ₹ 1,03,000/ is higher than total payable tax. In such case Section 234B is not applicable and tax refund is due 1,03,000/- Advance Tax paid minus 94,640/- tax due ie. ₹ 8,360.

Question 22.
Under section 208, obligation to pay advance tax arises in every case where the advance tax payable is ₹ 10,000 or more. State exception to this rule. [Alov. 2017, 2 Marks]
Answer:
Under Section 208, advance tax is payable by every person whose estimated total tax liability is ₹ 10,000/- or more in a financial year. However as per Section 207(2), following persons are not liable to pay advance tax : a. Resident individual aged 60 years or more at any time during previous year.
b. A person who is not having taxable income under head “Profits and Gains of Business or Profession”.

Question 23.
Mr. Subramany is engaged in the business of producing and selling toys. During the previous year 2020-21 his turnover was ₹ 1.80 crores. He opted for paying tax as per presumptive taxation scheme laid down in Section 44AD. He has no other income during the previous year. Is he liable to pay advance tax and if so, what is the minimum amount of advance tax to be paid and the due date for payment of such advance tax? [Nov. 2017, 3 Marks]
Answer:
Mr. Subramany has opted for presumptive taxation scheme under Section 44AD. His turnover is 1.80 Crores and presumptive income is 8% of ₹ 1.80 Crores ie. ₹ 14,40,000/-. His tax liability with existing rates of tax will be as under :

Particulars	Amount (₹)	Rate	Amount (₹)
On First	2,50,000	Nil	Nil
On Next	2,50,000	596	12,500
On Next	5,00,000	2096	1,00,000
On Balance	4,40,000	3096	1,32,000
	14,40,000		2,44,500
Add : 496 Less			9,780
Total Tax			2,54,280

He can deposit this amount as advance tax on or before 15th March. How-ever, amount paid upto 31 st March will also be treated as advance tax paid.
Important Note :
According to Finance Act, 2020, there are concessional alternate tax rate, according to which tax payable will be as under:

Particulars	Amount (₹)	Rate	Amount (₹)
On First	2,50,000	Nil	Nil
On Next	2,50,000	5%	12,500
On Next	2,50,000	10%	25,000
On Next	2,50,000	15%	37,500
On Next	2,50,000	20%	50,000
On Balance	1,90,000	25%	47,500
	14,40,000		1,72,500
Add : 4% Less			6,900
Total Tax			1,79,400

Question 24.
Mr. Dhanapal wishes to purchase a residential house costing ₹ 60 lakhs from Ms. Saipriya. The house is situated at Chennai. He also wants to purchase agricultural lands in a rural area for ₹ 65 lakhs. He wants to know whether there will be any obligation to deduct tax at source in these two situations. Both the buyer as well as the sellers are residents in India. Advise Mr. Dhanapal suitably. [Nov. 2018, 2 Marks]
Answer:
TDS is applicable @ 0.75% of Sales Consideration of residential house i.e. ₹ 60 lacs, because it exceeds 50 lacs, under Section 194-IA.
TDS is not applicable on agricultural land under section 194-IA, even when sales consideration exceeds ₹ 50 lacs.

Question 25.
Rahil & Co., a partnership firm is having a car dealership show-room. They have purchased cars for ₹ 2 crores from XYZ Ltd., car manufacturers, the cost of each car being more than ₹ 12 lakhs.
They sell the cars to individual buyers at a price yielding 10% margin on cost. State whether there will be any obligation to collect tax in the above two situations. [Nov. 2018, 2 Marks]
Answer:

1. Under Section 206C, TCS is not applicable on Sale or Motor Vehicles by manufacturers to dealers or distributors. Hence purchase of cars for ₹ 2 Crore by dealer Rahul & Co. from manufacturer XYZ Ltd. will not attract TCS, even cost of each car exceeds ₹ 10 lacs.
2. Sale of cars to individual buyers at a price of ₹ 13.2 lacs per car will attract TCS @ 0.75% under Section 206C, because value of each car exceeds ₹ 10 lacs.

Question 26.
Examine the TDS implications in the following cases along with reasons thereof:
1. Ms. Varsha received a sum of ₹ 95,000 on 31 st December 2020 towards maturity proceeds of LIC taken on 1st October 2014 for which sum assured was ₹ 80,000 and annual premium was ₹ 10,000.
2. Mr. Deepak transferred a residential house property to Mr. Karan for ₹ 45 lacs. The stamp duty value of such property is X 55 lacs.
3. XYZ Private Limited pays the following amounts to Mr. Narayan during previous year 2020-21:
(a) ₹ 22,000 towards fee for professional services.
(b) ₹ 18,000 towards royalty.
4. Payment of ₹ 1,75,000 made to Mr. Vaibhav for purchase of calendar according to specifications of M/s. ABC Limited. However, no material was supplied for such calendar by ABC Limited to Mr. Vaibhav.
5. Talent Private Limited pays ₹ 12,000 to Ms. Sudha, its director, towards sitting fee which is not taxable u/s 192.
6. Radha Limited is engaged for Shyam Limited only in the business of operation of call centre. On 18.03.2020, the total amount credited by Shyam Limited in the ledger account of Radha Limited is ₹ 70,000 regarding service charges of call centre. The amount is paid through cheque on 28.03.2020 by Shyam Limited. [May 2019, 7 Marks]
Answer:

S.No.	Explanation
1	The policy was taken after 31 st March 2012 and annual premium exceeds 1096 of sum assured. Hence maturity proceeds are not exempt under Section 10 (10D).
2	The Sales Consideration is less than ₹ 50 lacs, hence tax deduction at source is not applicable under Section 194-IA, irrespective of stamp duty value more than ₹ 50 lacs.
3	TDS on professional services is applicable on payment exceeding ₹ 30,000/­on each service under Section 194J. In the instant case professional fee ₹ 22,000/- and royalty ₹ 18,000/- are less than 30,000/- each. Hence no TDS.
4	Payment of ₹ 1,75,000/- for purchase of calendar is not in category of work contract, hence TDS under Section 194C is not applicable. It is a contract of Sale/purchase.
5	Sitting fee paid to Director of a company is entitled for TDS @ 7.5%, even the amount does not exceed  30,000 under section 194J.
6	Shyam Ltd. is required to deduct tax at source ‘ 1.5% of total amount 70,000/- under Section 194J on 18th March 2021, date of credit of service charges in its books. Date of actual payment is irrelevant.

Question 27.
Examine & explain the TDS implications in the following cases along with reasons thereof, assuming that the deductees are residents and having a PAN which they have duly furnished to the respective deductors.
1. Mr. Tandon received a sum of ₹ 1,75,000 as pre-mature withdrawal from Employees Provident Fund Scheme before continuous service of 5 years on account of termination of employment due to ill-health.
2. A sum of ₹ 42,000 has been credited as interest on recurring deposit by a banking company to the account of Mr. Hasan (aged 63 years).
3. Ms. Kaul won a lucky draw prize of ₹ 21,000. The lucky draw was organized by M/s. Maximus Retail Ltd. for its customer.
4. Finance Bank Ltd. sanctioned and disbursed a loan of ₹ 10 crores to Borrower Ltd. on 31.3.2021. Borrower Ltd. paid a sum of ₹ 1,00,000 as service fee to Finance Bank Ltd. for processing the loan application.
5. Mr. Ashok, working in a private company, is on deputation for 3 months (from December, 2020 to February, 2021) at Hyderabad where he pays a monthly house rent of ₹ 52,000 for those three months, totaling to ₹ 1,56,000. Rent is paid by him on the first day of the relevant month. [Nov. 2019, 7 Marks]
Answer:

S.No.	Explanation
1	As per Section 192A, withdrawal from recognized provident fund before completion of 5 years’ service is taxable if amount exceeds ₹ 50,000/-. But in the instant case termination of employment was due to ill health. As such provisions of TDS @ 7.5% are not applicable here.
2	As per Section 194A, there will be no TDS on interest on recurring deposit upto 50,000/- in case of Senior Citizen aged 60 years or more. In the instant case Mr. Hasan is aged 63 years, hence no TDS.
3	The amount of lucky draw comes under category of casual income. On such income TDS @ 30% is applicable if amount exceeds ₹ 10,000/-. Hence in the instant case TDS is applicable @ 30% on ₹ 21,000/-.
4	The sum of ₹ One lac paid by Borrower Ltd. to Finance Bank Ltd. is not covered in work contract, hence TDS is not applicable
5	According to Section 194-1, no TDS on payment of rent if the amount of rent credited/paid during a financial year does not exceed K 2,40,000/-. Hence in the instant case TDS is not applicable.

Residence and Scope of Total Income – CA Inter Tax Study Material is designed strictly as per the latest syllabus and exam pattern.

Residence and Scope of Total Income – CA Inter Taxation Study Material

Introduction

Question 1.
State with reason whether the following statement is true or false with regard to the provisions of the Income-tax Act, 1961 for the Assessment Year 2021-22.
(a) Income to a non-resident by way of interest royalty and fee for Tech-nical Services be made to accrue or arise in India is taxable in India irrespective of Territorial Nexus. [Nov. 2008, 2 Marks]
Answer:
Statement is true
The income of a non-resident which is arises or accrued in India is taxable irrespective of Territorial Nexus

Question 2.
State with reason whether the following statement is true or false with I® regard to the provisions of the Income-tax Act, 1961 for the Assessment Year 2021-22.
Mr. X Karta of Hindu undivided family claims that the Hindu undivided family is non-resident as the business of Hindu undivided family is trans¬acted from United Kingdom and all the policy decisions are taken there. [May 2009, 2 Marks]
Answer:
Statement is true

• The residential status of Hindu undivided family depends upon the control and management and residential status of Karta.
• The control and management is in UK and Karta in his personal capacity is also non-resident. Hence Hindu undivided family is non-resident.

Question 3.
How is the residential status of a company determined for the purpose of Income-tax Act, 1961 for the assessment year 2021-22. [May 2016, 4 Marks]
Answer:
Section 6(3)
Resident:

• A company is said to be resident if it is an Indian company and place of effective management at any time in the previous year is in India.
• Place of effective management means the place where the manage¬ment and commercial decisions are taken by the management.

Non-Resident:

• A company is said to be non-resident if a company does not satisfy both the above conditions of residence.

Question 4.
Mis. Vivitha paid a sum of 5,000 USD to Mr. Kulasekhara, a management consultant practicing in Colombo, specializing in project financing. The payment was made in Colombo to Mr. Kulasekhara who is a non-resident. The Consultancy related to a project in India with possible ceylonese collaboration. Is this payment chargeable to tax in India in the hands of Mr. Kulasekhara, since the services were used in India? [May 2011, 4 Marks]
Answer:

• Remuneration or fee paid for Technical Services paid by resident or non-resident to carry business or profession in India or to earn any income from any source in India is treated as deemed to be accrued or arise in India. Hence it is taxable for resident, not ordinary resident and non-resident.
• Here the above payment to Kulasekhara is taxable in India even he is non-resident.

Question 5.
Explain with reasons whether the following transactions attract income tax in India in the hands of recipients?
(a) Salary paid to Mr. David, a citizen of India ₹ 15,00,000 by the Central Government for the services rendered in Canada.
(b) Legal charges of ₹ 7,50,000 paid to Mr. Johnson, a lawyer of London, who visited India to represent a case at the Supreme Court.
(c) Royalty paid to Rajeev, a non-resident by Mr. Mukesh, a resident for a business carried on in Sri Lanka.
(d) Interest received of ₹ 1,00,000, on money borrowed from France, by Ms. Dyana, a non-resident for the business at Bangalore. [May 2015, 4 Marks]
Answer:
(a) As salary is paid by Government of India, it is deemed as accrued and arise in India. Hence, taxable in India.
(b) Since the income is received in India against Services rendered in India, it is taxable in India.
(c) The business is carried on outside India and recipient is a non-resident. Hence royalty paid to Rajiv is not taxable in India.
(d) The interest is received in India, Hence taxable in India.

Question 6.
State with reason whether the following receipt is taxable or not under the provision of Income-tax Act, 1961?

Mr. Federer, a non-resident residing in Sweden, has received rent from Mr. Nadal, also a non-resident residing in France in respect of a property j taken on lease at Mumbai. Since this income is received outside India from a non-resident. Federer claims that his income is not chargeable to Tax in India. [Nov. 2016, 2 Marks]
Answer:

Particulars	Relevant Provision
Section 9(1)	Asset is situated in India Source is from India Income is accrued or deemed to be accrued or arise in India. Hence Rent is taxable in India.

Question 6A.
State the conditions under which a non-resident is treated as resident but not ordinary resident, as inserted by Section 6(1A), applicable from Assessment year 2021-22.
Answer:
Even if an individual does not satisfy none of the two basic conditions, he is deemed to be resident but not ordinarily resident in the following cases:
(a) First exception (for Indian citizen) : An individual shall be deemed to be resident but not ordinarily resident in India, if he satisfies the following 3 conditions:

1. He is an Indian Citizen
2. His total income (Other than the income from foreign sources) exceeds Rs. 15,00,000 during the relevant previous year and
3. He is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.

It may be noted that this exception is not applicable in case of a foreign citizen, even if he is a person of Indian origin.

(b) Second exception: An individual shall be deemed to be resident but not ordinarily resident in India if he satisfies the following 4 conditions:-

1. He is an Indian Citizen or a person of Indian origin.
2. His total income (Other than the income from foreign sources) exceeds Rs. 15,00,000 during the relevant previous year.
3. He comes to India an a visit during the relevant previous year and
4. He is in India for 120 days (or more but less than 182 days) during the relevant previous year and 365 days (or more) during 4 years immediately preceding the relevant previous year.

Calculation of Days

Question 7.
Ms. Bindu, a non-resident, residing in New York since 1991, came back to India on 19-02-2019 for permanent settlement in India. Explain the residential status of Ms, Bindu for the Assessment Year 2021-22.
In accordance with the various provision of Indian Income-tax Act. [May 2015, 4 Marks]
Answer:

Question 8.
Brett Lee, an Australian cricket player visits India for 100 days in every financial year. This has been his practice for the financial years. Find out his residential status for the assessment year 2021-22. [Nov. 2011, 4 Marks]
Answer:

Question 9.
Mr. Soham, an Indian Citizen left India on 20-04-2019 for the first time to setup a software firm in Singapore. On 10-04-2020, he entered into an agreement with LK Limited, an Indian Company for the transfer of technical documents and designs to setup an automobile factory in Faridabad. He reached India along with his team to render the requisite services on 15-05-2020 and was able to complete his assignment on 20-08-2020. He left for Singapore on 21 08-2020. He charged ₹ 50 Lakhs for his services from LK Limited. Determine the residential status of Mr. Soham 5 for the Assessment Year 2021-2022 and explain as to ‘the taxability of the fees charged ‘ from LK Limited as per the Income-tax Act, 1961. [Nov. 2015, 8 Marks]
Answer:

On the basis of basic conditions, Mr. Soham is non-resident. But, according to amendments applicable from AY 2021 -22, anon-resident shall be deemed as not ordinary resident if he satisfies following conditions:

(a) He is an Indian Citizen
(b) His total income (Other than the income from foreign sources) exceeds Rs. 15,00,000 during the relevant previous year and
(c) He is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.

Conclusion:
In view of above, Mr. Soham is not ordinary resident for RY. 2020-21 (A.Y. 2021-22). It has been assumed that he fulfils (c) also.
TAXABILITY : Any Income arising from India is taxable in the hands of Non-Resident also.

Question 10.
During the last four years preceding the financial year 2020-21, Mr. Damodhar, a citizen of India was present in India for 430 days. ‘During the last seven previous years preceding the previous year 2020-21, he was present in India for 830 days. Mr. Damodhar is a member of crew of a Dubai bound Indian ship, carrying passengers in the international waters, which left Kochi port in Kerala, on 12th August, 2020.
Following details are made available to you for the previous year 2020-21

Particulars	Date
Date entered into the Continuous Discharge Certificate in respect of Joining the Ship by Mr. Damodhar.	12 August, 2020
Date entered into the Continuous Discharge Certificate in respect of signing of the ship by Mr. Damodhar.	21st January, 2021

In May, 2019 he had gone out of India to Singapore and Malaysia on a private tour for a continuous period of 29 days.

You are required to determine the residential status of Mr. Damodhar for the previous year 2020-21. [May 2017, 4 Marks]
Answer:

Previous years 2020-21	30 + 31 + 30 + 31 + 12 = 134 days
Previous years 2016-17 to 2019-20 ’	430 days four previous years preceding the relevant previous year
Previous years 2013-14 to 2019-20 ‘	830 days in seven previous years preceding the rele­vant previous year
Case	He is member of crew hence he has to stay at least 182 days in PY 2020-21. But he stayed only for 134 days hence he is NON-RESIDENT

Incidence of Tax Numerical Questions

Question 11.
From the following particulars of Income furnished by Mr. Anirudh pertaining to the year ended 31.3.2020, compute the total income for the assessment year 2020-21, if he is
(i) Resident and ordinary resident;
(ii) Resident but not ordinarily resident;
(iii) Non-resident :

Particulars	Amount
Profit on sale of shares in Indian Company received in Germany	15,000
Dividend From a Japanese Company received in Japan	10,000
Rent from property in London deposited in a bank in London, later on remitted to India through approved banking channels	75,000
Dividend from RP Ltd., an Indian Company	6,000
Agricultural income from lands in Gujarat	25,000

Answer:
Computation of Total Income of Mr. Anirudh for the Assessment Year 2021-22

Question 12.
Devesh and Siddhant are brothers and they earned the following incomes during the financial year 2020-21. Devesh settled in America in the year 1986 and Siddhant settled in Mumbai. Devesh visits India for 20 days every year. Siddhant also visits America every year for a month.
Compute their total income for the Assessment year 2021-22 from the following information. [May 2013, 8 Marks]

Answer:
Residential Status:

1. Devesh: He visited India for 20 days every year hence he is Non-Resident.
2. Siddhant: He is staying India every year for more than 182 days hence he is Resident.

Note 1: Standard Deduction u/s 24 is allowed @3096. Devesh will be taxable 96000 × 70/100 = 67200 and Siddhant will be taxable 55000 × 70/100 = 38500.

Note 2: Deductions under Chapter VIA will be:

Question 13.
Mrs. Geeta and Mrs. Leena are sisters and they earned the following income during the Financial Year 2020-21. Mrs. Geeta is settled in Malaysia since 1985 and visits India for a month every year. Mrs. Leena is settled in Indore since her marriage in 1993. Compute the total income of Mrs. Geeta and Mrs. Leena for the assessment year 2021-22. [Nov. 2014, 8 Marks]

Answer:
Computation of Total Income of Geeta and Leena for the Assessment Year 2021-22

Note 1: Deductions under Chapter VIA will be:

Question 14.
Mr. Rajnesh, a citizen of India, serving in the Ministry of Finance in India and transferred to High Commission of Australia on 15th March 2019. He did not come to India during the financial year 2020-21. His income during the financial year 2020-21 is given here under:

Particulars	Amount
Salary from Govt, of India	7,20,000
Foreign Allowances from Govt, of India	6,00,000
Rent from a house situated at London, received in London	3,60,000
Interest accrued on National Saving Certificate during the year	45,000

Compute the Gross Total Income of Mr. Rajnesh for the Assessment year 2021-22. [Nov. 2016, 4 Marks]
Answer:
Residential Status of Mr. Rajnesh will be Non-Resident. He has not satisfying the condition No. 1 of 182 days.

Computation of Gross Total Income of Mr. Rajnesh for the Assessment Year 2021-22

Particulars	Amount	Amount
Income From Salary:
Salary from Govt, of India	7,20,000
Foreign Allowances from Govt, of India	Exempt
Gross Salary	7,20,000
Less: Standard Deduction u/s 16	50,000	6,70,000
Income from House Property:
Rent from a house situated at London, received in London	Not Taxable	NIL
Income From Other Sources:
Interest accrued on National Saving Certificate during the year	45,000	45,000
Gross Total Income		7,15,000

Question 15.
A Korean Company Damjung Ltd. Entered in to the following transactions during the financial year 2020-21. Explain briefly whether these receipts are taxable in India.

Sl. No.	Particulars
1	Received ₹ 20 Lakhs from a non-resident for use of Patent for a business in India.
2	Received ₹ 15 Lakhs from a non-resident Indian for use of know-how for a business in Sri Lanka and this amount was receive in Japan. Assume that the above amount is converted/stated in Indian Rupees
3	Received ₹ 7 Lakhs from RR Co. Ltd. An Indian Company for providing technical know-how in India.
4	Received ₹ 5 Lakhs from R & Co. Mumbai for conducting the feasibility study for a new project in Nepal, and the payment was made in Nepal.

Answer:

S. No.	Particulars	Taxable or Not Taxable	Reason
1	Received ₹20 Lakhs from a non­- resident for use of Patent for a business in India.	Taxable	Deemed to be accrue or arise in India as Patents are used in India
2	Received ₹ 15 Lakhs from a non­resident Indian for use of know-how for a business in Sri Lanka and this amount was receive in Japan. Assume that the above amount is converted/stated in Indian Rupees	Not Taxable	Other Foreign Income. Outside Income. Not arise in India.
3	Received ₹ 7 Lakhs from RR Co. Ltd. An Indian Company for providing technical know-how in India.	Taxable	Deemed to be accrue or arise in India as techni­cal know-how are used in India
4	Received ₹X 5 Lakhs from R & Co. Mumbai for conducting the feasibil­ity study for a new project in Nepal, and the payment was made in Nepal	Not Taxable	Other Foreign Income. Outside Income. Not arise in India.

Question 16.
Compute the Gross Total Income in the hands of an individual, if he is
(a) a resident and ordinary resident; and
(b) a non-resident for the AY 2021-22. [Nov. 2018, 10 Marks]

Answer:
Computation of Gross Total Income of Mr. Individual for the Assessment Year 2021-22

Question 17.
Following incomes are derived by Mr, Krishna Kumar during the year ended 31-3-2021 :
Pension received from the US Government 3,20,000
Agricultural income from lands in Malaysia 2,70,000 Kent received from let out property in Colombo Sri Lanka 4,20,000 Discuss the taxability of the above items where the assessee is (i) Resident, (ii) Non-resident. [Nov. 2018, 6 Marks]
Answer:
Taxability of the Items

Question 18.
The following are the incomes of Shri Subhash Chandra, a Citizen of India for the previous year 2020-21.

Sl. No.	Particulars
1	Income from business in India ₹ 2,00,000 the business is controlled from London and ? 60,000 were remitted to London.
2	Profits from business earned in Japan ₹ 70,000 of which ₹ 20,000 were received in India. This business is controlled from India.
3	Untaxed income of ₹ 1,30,000 for the year 2017-18 of a business in England which was brought in India on 3rd March, 2019
4	Royalty of ₹ 4,00,000 received from Shri Ramesh, a resident for techni­cal services provided to run a business outside India.
5	Agricultural Income of ₹ 90,000 in Bhutan.
6	Income of ₹ 73,000 from House property in Dubai, which was deposited in bank at Dubai.

Answer:
Compute Gross Total Income of Shri Subhash Chandra for the Assessment year 2021-22, if he is Resident and Ordinary Resident and Resident and Not Ordinary Resident.

Framework for Preparation – CA Inter Accounts Study Material is designed strictly as per the latest syllabus and exam pattern.

Framework for Preparation – CA Inter Accounts Study Material

Theory Questions

Question 1. What are the qualitative characteristics that improve the usefulness of information provided in the financial statements? (4 Marks) (Nov 2011)
Answer:
The following qualitative characteristics will help in improving the usefulness of the information provided in the financial statements:
1. Understandability:
Information in financial statements should be presented in a manner that the users with reasonable knowledge of business and economic activities and accounting, may readily understand it. All relevant information should be given therein.

2. Relevance :
The relevance of a piece of information should be judged by its materiality i.e. whether its omission or misstatement can influence economic decisions of users or not. No relevant information should be withheld on the grounds of complexity.

3. Reliability:
The information is said to be reliable when transactions and events reported are represented faithfully and also when they are reported in terms of their substance and economic reality. Prudence concept is also used whenever required.

4. Comparability:
The financial statements should permit both inter-firm and intra firm comparison. One essential feature or requirement of comparability is disclosure of financial effect of change in accounting policies.

Question 2.
What are the qualitative characteristics of the financial statements which improve the usefulness of the information furnished therein? (4 Marks) (May 2013)
Answer:
The following qualitative characteristics will help in improving the usefulness of the information provided in the financial statements:
1. Understandability:
Information in financial statements should be presented in a manner that the users with reasonable knowledge of business and economic activities and accounting, may readily understand it. All relevant information should be given therein.

2. Relevance :
The relevance of a piece of information should be judged by its materiality i.e. whether its omission or misstatement can influence economic decisions of users or not. No relevant information should be withheld on the grounds of complexity.

3. Reliability:
The information is said to be reliable when transactions and events reported are represented faithfully and also when they are reported in terms of their substance and economic reality. Prudence concept is also used whenever required.

4. Comparability:
The financial statements should permit both inter-firm and intra firm comparison. One essential feature or requirement of comparability is disclosure of financial effect of change in accounting policies.

Question 3.
Explain in brief, the alternative measurement bases, for determining the value at which an element can be recognized in the Balance Sheet or Statement of Profit and Loss. (4 Marks) (Nov 2016)
Answer:
The Framework for Recognition and Presentation of Financial statements recognizes four alternative measurement bases for the purpose of determining the value at which an element can be recognized in the balance sheet or statement of profit and loss.
These bases are:

1. Historical Cost;
2. Current cost
3. Realisable (Settlement) Value and
4. Present Value.

Let us elaborate each one of them.
1. Historical Cost:
Historical cost means acquisition price. According to this, assets are recorded at an amount of cash or cash equivalent paid or the fair value of the asset at the time of acquisition. Liabilities are recorded at the amount of proceeds received in exchange for the obligation.

2. Current Cost:
Current cost gives an alternative measurement basis. Assets are carried out at the amount of cash or cash equivalent that would have to be paid if the same or an equivalent asset was acquired currently. Liabilities are carried at the undiscounted amount of cash or cash equivalents that would be required to settle the obligation currently.

3. Realisable (Settlement) Value:
As per realisable value, assets are carried at the amount of cash or cash equivalents that could currently be obtained by selling the assets in an orderly disposal. Liabilities are carried at their settlement values; ie. the undiscounted amount of cash or cash equivalents paid to satisfy the liabilities in the normal course of business.

4. Present Value:
Under present value convention, assets are carried at present value of future net cash flows generated by the concerned assets in the normal course of business. Liabilities under this convention are carried at present value of future net cash flows that are expected to be required to settle the liability in the normal course of business.

Question 4.
(a) Write short note on main elements of Financial Statements.
(b) ABC Ltd. has entered into a binding agreement with XYZ Ltd. to buy a custom-made machine amounting to ₹ 4,00,000. As on 31st March, 2016 before delivery of the machine, ABC Ltd. had to change its method of production. The new method will not require the machine ordered and so it shall be scrapped after delivery. The expected scrap value is ‘NIL’.
Show’ the treatment of machine in the books of ABC Ltd. (4 × 2 = 8 Marks) (May 2017)
Answer:
(a) Elements of Financial Statements
The framework classifies items of financial statements can be classified in five broad groups depending on their economic characteristics: Asset, Liability, Equity, Income/Gain and Expense/Loss.

(b) A liability is recognized when outflow of economic resources in settlement of a present obligation can be anticipated and the value of outflow can be reliably measured.

In the given case, ABC Ltd. should recognize a liability of ₹ 4,00,000 payable to XYZ Ltd.

When flow of economic benefit to the enterprise beyond the current accounting period is considered improbable, the expenditure incurred is recognized as an expense rather than as an asset. In the present case, flow of future economic benefit from the machine to the enterprise is improbable. The entire amount of purchase price of the machine should be recognized as an expense.

Hence ABC Ltd. should charge the amount of ₹ 4,00,000 (being loss due to change in production method) to Profit and loss statement and record the corresponding liability (amount payable to XYZ Ltd.) for the same amount in the books for the year ended 31st March, 2016.

Question 5.
With regard to financial statements name any four : (RTP)

1. Users
2. Qualitative characteristics
3. Elements.

Answer:

1. Users of financial statements:
   Investors, Employees, Lenders, Supplies/Creditors, Customers, Government & Public
2. Qualitative Characteristics of Financial Statements:
   Understandability, Relevance, Comparability, Reliability & Faithful Representation
3. Elements of Financial Statements:
   Asset, Liability, Equity, Income/Gain and Expense/Loss

Question 6.
(a) Explain in brief, the alternative measurement bases, for determining the value at which an element can be recognized in the Balance Sheet or Statement of Profit and Loss.
(b) Mohan started a business on 1st April 2017 with ₹ 12,00,000 represented by 60,000 units of ₹ 20 each. During the financial year ending on 31st March, 2018, he sold the entire stock for ₹ 30 each. In order to maintain the capital intact, calculate the maximum amount, which can be withdrawn by Mohan in the year 2017-18 if Financial Capital is maintained at historical cost. (RTP)
Answer:
(a) See similar question above.
(b)

Thus, in order to maintain the capital intact, Mohan can withdraw ₹ 6,00,000 as the maximum amount.

Question 7.
Briefly explain the elements of financial statements? (4 Marks) (May 2018)
Answer:
Elements of Financial Statements

Question 8.
‘One of the characteristics of the financial statement is neutrality.’ Do you agree with this statement? Explain in brief.
Answer:
Yes, one of the characteristics of financial statements is neutrality. To be reliable, the information contained in financial statement must be neutral, that is free from bias.

Financial Statements are not neutral if by the selection or presentation of information, the focus of analysis could shift from one area of business to another thereby arriving at a totally different conclusion based on the business results.

Information contained in the financial statements must be free from bias. It should reflect a balanced view of the financial position of the company without attempting to present them in biased manner. Financial statements cannot be prepared with the purpose to influence certain division, i.e. they must be neutral.

Practical Questions

Question 9.
A Ltd. entered into a binding contract with C Ltd. to buy a machine for ₹ 1,00,000. The machine is to be delivered on 15th February, 2009. On 1st January, 2009, A Ltd. changed its process of production. The new process will not require the machine ordered and it shall have to be scrapped after delivery. The expected scrap value of the machine is nil.

Explain how A Ltd. should recognise the entire transaction in the books of account for the year ended 31st March, 2009. (2 Marks) (Nov 2009)
Answer:
A Ltd. entered into a binding contract with C Ltd. and therefore, it should recognise a liability of ₹ 1,00,000. The entire amount of purchase price of the machine should be recognised in the year ended 31st March, 2009 as loss because future economic benefit from the machine to the enterprise is improbable.

The accounting entry should be as follows:

Question 10.
ABC Ltd. has entered into a binding agreement with XYZ Ltd. to buy a custom-made machine amounting to ₹ 4,00,000. As on 31 st March, 2016 before delivery of the machine, ABC Ltd. had to change its method of production. The new method will not require the machine ordered and so it shall be scrapped after delivery. The expected scrap value is ‘NIL’.

Show the treatment of machine in the books of ABC Ltd. (4 Marks) (May 2017)
Answer:
A liability is recognized when outflow of economic resources in settlement of a present obligation can be anticipated and the value of outflow can be reliably measured. In the given case, ABC Ltd. should recognize a liability of ₹ 4,00,000 payable to XYZ Ltd.

When flow of economic benefit to the enterprise beyond the current accounting period is considered improbable, the expenditure incurred is recognized as an expense rather than as an asset. In the present case, flow of future economic benefit from the machine to the enterprise is improbable. The entire amount of purchase price of the machine should be recognized as an expense.

Hence ABC Ltd. should charge the amount of ₹ 4,00,000 (being loss due to change in production method) to Profit and loss statement and record the corresponding liability (amount payable to XYZ Ltd.) for the same amount in the books for the year ended 31st March, 2016.

Question 11.
Shankar started a business on 1 st April, 2017 with ₹ 12,00,000 represented by 60,000 units of ₹ 20 each. During the financial year ending on 31st March, 2018, he sold the entire stock for ₹ 30 each. In order to maintain the capital intact, calculate the maximum amount, which can be withdrawn by Shankar in the year 2017-18 if Financial Capital is maintained at Historical cost. (4 Marks) (May 2018)
Answer:

Therefore, ₹ 6,00,000 is the maximum amount which can be withdrawn by Shankar in the year 2017-18 if the Financial Capital Maintenance is maintained at Historical Cost.

Insurance Claims for Loss of Stock and Loss of Profit – CA Inter Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

Insurance Claims for Loss of Stock and Loss of Profit – CA Inter Accounts Study Material

Theory Questions

Question 1.
What is Consequential loss policy and what items are generally covered by such policy? (4 marks) (May 2017)
Answer:
Business enterprises get insured against the loss of stock on the happening of certain events such as fire, flood, theft, earthquake etc. Insurance being a contract of indemnity, the claim for loss is restricted to the actual loss of assets. Sometimes an enterprise also gets itself insured against consequential loss of profit due to decreased turnover, increased expenses etc.

If loss of profits consequent to the event or mis-happening (Fire, flood, theft etc.) is also insured, the policy is known as loss of profit or consequential loss policy.

The Loss of Profit Policy normally covers the following items:

1. Loss of net profit
2. Standing charges.
3. Any increased cost of working e.g., renting of temporary premises.

Loss Of Stock — Simple Questions

Question 2.
The premises of X Ltd. caught fire on 22nd January, 2013 and the stock was damaged. The value of goods salvaged was negligible. The firm made up accounts to 31st March each year. On 31st March, 2012 the stock at cost was ₹ 13,27,200 as against ₹ 9,62,200 on 31st March, 2011.

Purchases from 1st April, 2012 to the date of fire were ₹ 34,82,700 as against ₹ 45,25,000 for the full year 2011-12 and the corresponding sales figures were ₹ 49,17,000 and ₹ 52,00,000 respectively.

You are given the following further information:

1. In July, 2012, goods costing ₹ 1,00,000 were given away for advertising purposes, no entries being made in the books.
2. The rate of gross profit is constant.

X Ltd. had taken an insurance policy of ₹ 5,50,000 which was subject to the average clause. From the above information, you are required to make an estimate of the stock in hand on the date of fire and compute the amount of the claim to be lodged to the insurance company. (RTP)
Answer:
Memorandum Trading Account
[From 1st April, 2012 to 22nd January, 2013]

Computation showing Claim for loss of stock:

Since policy amount is less than claim amount, claim will be restricted to policy amount only. Therefore, claim of ₹ 5,50,000 should be lodged by X Ltd. to the insurance company.

Working Note 1:

Trading Account for the year ended on 31st March, 2012

Rate of gross profit to sales = 10,40,000/52,00,000 × 100 = 20%.

Question 3.
The premises of A Ltd. caught fire on 22nd January, 2017, and the stock was damaged. The firm makes account up to 31st March each year. On 31st March, 2016 the stock at cost was ₹ 6,63,600 as against ₹ 4,81,100 on 31st March, 2015.

Purchases from 1st April, 2016 to the date of fire were ₹ 17,41,350 as against ₹ 22,62,500 for the full year 2015-16 and the corresponding sales figures were ₹ 24,58,500 and ₹ 26,00,000 respectively. You are given the following further information:

1. In July, 2016, goods costing ₹ 50,000 were given away for advertising purposes, no entries being made in the books.
2. During 2016-17, a clerk had misappropriated unrecorded cash sales. It is estimated that the defalcation averaged ₹ 1,000 per week from 1st April, 2016 until the clerk was dismissed on 18th August, 2016.
3. The rate of gross profit is constant.
   From the above information calculate the stock in hand on the date of fire. (RTP)

Answer:
Let us first of all ascertain the rate of gross profit for the year 2015-16;
Trading A/c for the year ended 31-3-2016

Rate of gross profit \(=\frac{\mathrm{GP}}{\text { Sales }}\) × 100
= \(\frac{5,20,000}{26,00,000}\) × 100 = 20%

Memorandum Trading A/c for the period from 1-4-2016 to 22-1-2017

Stock in hand on the date of fire was ₹ 3,72,150.
Working Note showing cash sales defalcated by the Accountant:
Defalcation period = 1-4-2016 to 18-8-2016 = 140 days
Since, 140 days/7 weeks = 20 weeks
Therefore, amount of defalcation = 20 weeks × ₹ 1,000 = ₹ 20,000.

Question 4.
A fire broke out in the godown of a business house on 8th July, 2009. Goods costing ₹ 2,03,000 in a small sub-godown remain unaffected by fire. The goods retrieved in a damaged condition from the main godown were valued at ₹ 1,97,000.

The following particulars were available from the books of account:
Stock on the last Balance Sheet date at 31st March, 2009 was ₹ 15,72,000. Purchases for the period from 1st April, 2009 to 8th July, 2009 were ₹ 37,10,000 and sales during the same period amounted to ₹ 52,60,000. The average gross profit margin was 30% on sales.

The business house has a fire insurance policy for ₹ 10,00,000 in respect of its entire stock. Assist the Accountant of the business house in computing the amount of claim of loss by fire. (8 marks) (Nov. 2009)
Answer:
Computation showing the amount of claim:

Application of average clause:
Amount of claim \(=\frac{\text { Amount of policy }}{\text { Stock on the date of fire }}\) × Loss of stock
= \(\frac{\text { Rs. } 10,00,000}{\text { Rs. } 16,00,000}\) × 12,00,000
= ₹ 7,50,000

Working Note:

Memorandum Trading Account for the period from 1st April, 2009 to 8th July, 2009

Question 5.
On 30th March, 2011 tire occurred in the premises of M/s Suraj Brothers. The concern had taken an insurance policy of ₹ 60,000 which was subject to the average clause. From the books of account, the following particulars are available relating to the period 1st January to 30th March, 2011.

1. Stock as per Balance Sheet at 31st December, 2010, ₹ 95,600.
2. Purchases (including purchase of machinery costing ₹ 30,000) ₹ 1,70,000
3. Wages (including wages ₹ 3,000 for installation of machinery) ₹ 50,000.
4. Sales (including goods sold on approval basis amounting to ₹ 49,500) ₹ 2,75,000. No approval has been received in respect of 2/3rd of the goods sold on approval.
5. The average rate of gross profit is 20% of sales.
6. The value of the salvaged goods was ₹ 12,300.

You are required to compute the amount of the claim to be lodged to the insurance company. (5 marks) (May 2011)

Answer:
Computation showing the claim for loss of stock

A claim of ₹ 48,211 should be lodged by M/s Suraj Brothers to the insurance company.

Working Notes:

I. Calculation of closing stock as on 30th March, 2011
Memorandum Trading Account for (from 1st January, 2011 to 30th March, 2011)

II. Computation of goods with customers
Since no approval for sale has been received for the goods of ₹ 33,000 (ie. 2/3 of ₹ 49,500) hence, these should be valued at cost ie. ₹ 33,000 – 20% of ₹ 33,000 = ₹ 26,400.

III. Computation of actual sales
Total sales – Sale of goods on approval = ₹ 2,75,000 – ₹ 33,000 = ₹ 2,42,000.

Question 6.
On 29th August, 2012, the godown of a trader caught fire and a large part of the stock of goods was destroyed. However, goods costing ₹ 1,08,000 could be salvaged incurring firefighting expenses amounting to ₹ 4,700.
The trader provides you the following additional information:

The insurance company also admitted firefighting expenses. The trader had taken the fire insurance policy for ₹ 9,00,000 with an average clause.
Calculate the amount of the claim that will be admitted by the insurance company. (8 Marks) (Nov. 2012)
Answer:
Memorandum Trading Account for the period 1st April, 2012 to 29th August, 2012

Statement showing computation of Insurance Claim

Note:
Since policy amount is more than claim amount, average clause will not apply. Therefore, claim amount of ₹ 7,79,300 will be admitted by the Insurance Company.

Working Note:

Trading Account for the year ended 31st March, 2012

Rate of Gross Profit in 2011 -12

Question 7.
On 15th December, 2012, a fire occurred in the premises of M/s. OM Exports. Most of the stocks were destroyed. Cost of stock salvaged being ₹ 1,40,000. From the books of account, the following particulars were available:

1. Stock at the close of account on 31st March, 2012 was valued at ₹ 9,40,000.
2. Purchases from 1-4-2012 to 15-12-2012 amounted to ₹ 13,20,000 and the sales during that period amounted to ₹ 20,25,000.

On the basis of his accounts for the past three years, it appears that average gross profit ratio is 20% on sales.
Compute the amount of the claim, if the stock were insured for ₹ 4,00,000. (5 marks) (May 2013)
Answer:
Memorandum Trading Account For the period 1-4-2012 to 15-12-2012

Statement showing computation of Claim

As the value of stock is more than insured value, amount of claim would be subject to average clause.
Amount of Claim \(=\frac{\text { Amount of Policy }}{\text { Value of Stock }}\) × Actual Loss of
Amount of Claim = \(\frac{4,00,000}{6,40,000}\) × 5 00,000 = ₹ 3,12,500

Question 8.
A fire occurred in the premises of M/s. Kailash & Cc. on 30th September, 2013. From the following particulars relating to the period from 1 st April, 2013 to 30th September, 2013, you are required to ascertain the amount of claim to be filed with the Insurance Company for the loss of Stock. The company has taken an Insurance policy for ₹ 75,000 which is subject to average clause. The value of goods salvaged was estimated at ₹ 27,000. The average rate of Gross Profit was 20% throughout the period.

(8 marks) (Nov. 2014)
Answer:
Memorandum Trading Account for the period 1st April, 2013 to 30th Sept., 2013

Statement showing computation of Insurance Claim

Note:
Since policy amount is less than claim amount, average clause will apply. Therefore, claim amount will be computed by applying the formula
Claim \(=\frac{\text { Insured value }}{\text { Total cost }}\) × Loss suffered
Claim amount = ₹ 60,689 (1,14,500 × 75,000/1,41,500)

Question 9.
On 1st April, 2016 the stock of Mr. Hariprasad was destroyed by fire but sufficient records were saved from which following particulars w ere ascertained:

In valuing the stock for the Balance Sheet at 31st Dec. 2015 ₹ 4,600 had been written off on certain stock which was a poor selling line having the cost ₹ 13,800. A portion of these goods were sold in March, 2016 at a loss of ₹ 500 on original cost of ₹ 6,900. The remainder of this stock was now estimated to be worth its original cost. Subject to the above exception gross profit had remained at a uniform rate throughout the year.
The value of stock salvaged was ₹ 11,600. The policy was for ₹ 1,00,000 and was subject to average clause.
Work out the amount of the claim of loss by fire. (8 Marks) (Nov. 2016)
Answer:
Trading Account for year 2015

The (normal) rate of gross profit to sales is = \(\frac{1,94,800}{9,74,000}\) × 100 = 20%

Memorandum Trading Account upto March 31, 2016

* At cost. (Its Book value is ₹ 9,200).

Computation of Insurance Claim:

Claim subject to average clause:
\(=\frac{\text { Amount of policy }}{\text { Value of Stock }}\) × Actual Loss of Stock
= \(\frac{1,00,000}{1,16,100}\) × 1,04,500
= ₹ 90,009

Question 10.
On 30th March, 2018 fire occurred in the premises of M/s Alok & Co. The concern had taken an insurance policy of ₹ 1,20,000 which was subject to the average clause. From the books of account, the following particulars are available relating to the period 1st January to 30th March, 2018:

No approval has been received in respect of 2/ 3rd of the goods sold on approval.
(v) The average rate of gross profit is 20% of sales.
(vi) The value of the salvaged goods was ₹ 24,600
You are required to compute the amount of the claim to be lodged to the Insurance Company. (May 2018) (10 Marks)
Answer:
Computation showing the claim for loss of stock

A claim of ₹ 96,422 should be lodged bv M/s Alok & Co. to the insurance company.

Working Notes:

I. Calculation of closing stock as on 30th March, 2018
Memorandum Trading Account for the period (from 1st January, 2018 to 30th March, 2018)

* This would form part of closing stock (since there has been no sale).

II. Calculation of goods with customers
Since no approval for sale has been received for the goods of ₹ 66,000 (ie. 2/3 of < 99,000) hence, these should be valued at cost ie. ₹ 66,000 – 20% of ₹ 66,000 = ₹ 52,800.

III. Calculation of actual sales
Total sales – Sale of goods on approval (2 /3rd) = ₹ 5,50,000 – ₹ 66,000 = ₹ 4,84,000.

Question 11.
A trader’s godown caught fire on 29th August, 2017, and a large part of the stock of goods was destroyed. However, goods costing ₹ 54,000 could be salvaged incurring firefighting expenses amounting to ₹ 2,350.
The trader provides you the following additional information:

The insurance company also admitted firefighting expenses. The trader had taken the fire insurance policy for ₹ 4,50,000 with an average clause.
You are required to calculate the amount of the claim that will be admitted by the insurance company.
Answer:
Memorandum Trading Account for the period 1st April, 2017 to 29th August, 2017

Statement Showing computation of Insurance Claim

Note:
Since policy amount is more than claim amount, average clause will not apply. Therefore, claim amount of ₹ 3,89,650 will be admitted by the Insurance Company.

Working Note:

Trading Account for the year ended 31st March, 2017

Rate of Gross Profit in 2016-17
Gross profit/Sales × 100 = 12,00,000/40,00,000 × 100 = 30%

Question 12.
The premises of V Ltd. caught fire on 22nd January, 2015, and the stock was damaged. The firm makes account up to 31st March each year. On 31st March, 2014 the stock at cost was ₹ 13,27,200 as against ₹ 9,62,200 on 31st March, 2013.

Purchases from 1st April, 2014 to the date of fire were ₹ 34,82,700 as against ₹ 45,25,000 for the full year 2013-14 and the corresponding sales figures were ₹ 49,17,000 and ₹ 52,00,000 respectively. You are given the following further information:

1. In July, 2014, goods costing ₹ 1,00,000 were given away for advertising purposes, no entries being made in the books.
2. During 2014-15, a clerk had misappropriated unrecorded cash sales. It is estimated that the defalcation averaged ₹ 2,000 per w eek from 1st April, 2014 until the clerk was dismissed on 18th August, 2014.
3. The rate of gross profit is constant.

From the above information calculate the stock in hand on the date of fire.
Answer:
Let us first of all ascertain the rate of gross profit for the year 2013-14.
Trading A/c for the year ended 31-3-2014

Rate of gross profit \(=\frac{\mathrm{GP}}{\text { Sales }}\) × 100
\(\frac{10,40,000}{52,00,000}\) × 100 = 20%

Memorandum Trading A/c for the period from 1-4-2014 to 22-1-2015

Estimated stock in hand on the date of fire = ₹ 7,44,100.
Working Note showing cash sales defalcated by the Accountant:
Defalcation period = 1.4.2014 to 18.8.2014 = 140 days
Since, 140 days/7 weeks = 20 weeks
Therefore, amount of defalcation = 20 weeks × ₹ 2,000 = ₹ 40,000.

Question 13.
On 2.6.2018 the stock of Mr. B was destroyed by fire. However, following particulars were furnished from the records saved:

Sales upto 2.6.2018 includes ₹ 75,000 being the goods not dispatched to the customers. The sales invoice price is ₹ 75,000.

Purchases upto 2.6.2018 includes a machinery acquired for ₹ 15,000.
Purchases upto 2.6.2018 does not include goods worth ₹ 30,000 received from suppliers, as invoice not received upto the date of fire. These goods have remained in the godown at the time of fire. The insurance policy is for ₹ 1,20,000 and it is subject to average clause. Ascertain the amount of claim for loss of stock.
Answer:
Trading Account for the year ended 31.3.2018

Memorandum Trading A/c for the period from 1.4.2018 to 2.6.2018


Computation showing the Insurance Claim:
Claim subject to average clause =

Question 14.
On 15th December, 2017, a fire occurred in the premises of M/s. XYZ. Most of the stocks were destroyed. Cost of stock salvaged being ₹ 1,40,000. Stock on 15 th December, 2017 was valued at ₹ 6,40,000. Compute the amount of the claim, if the stock were insured for ₹ 4,00,000.
Answer:

As the value of stock is more than insured value, amount of claim would be subject to average clause.
Amount of Claim \(=\frac{\text { Amount of Policy }}{\text { Value of Stock }}\) × Actual Loss of Stock
Amount of Claim = \(\frac{4,00,000}{6,40,000}\) × 5,00,000 = ₹ 3,12,500

Question 15.
A trader’s godown caught fire on 29th August, 2017, and a large part of the stock of goods was destroyed. However, goods costing ₹ 54,000 could be salvaged incurring firefighting expenses amounting to ₹ 2,350.
The trader provides you the following additional information:

The insurance company also admitted firefighting expenses. The trader had taken the fire insurance policy for ₹ 4,50,000 with an average clause.
You are required to calculate the amount of the claim that will be admitted by the insurance company.
Answer:
Memorandum Trading Account for the period 1st April, 2017 to 29th August, 2017

Statement Showing Computation of Insurance Claim

Note:
Since policy amount is more than claim amount, average clause will not apply. Therefore, claim amount of ₹ 3,89,650 will be admitted by the Insurance Company.

Working Note:

Trading Account for the year ended 31st March, 2017

Rate of Gross Profit in 2016-17

Loss Of Stock — Advanced

Question 16.
A fire occurred in the premises of M/s. Fireproof Co. on 31st August, 2010. From the following particulars relating to the period from 1st April, 2010 to 31st August, 2010, you are requested to ascertain the amount of claim to be filed with the insurance company for the loss of stock. The concern had taken an insurance policy for ₹ 60,000 which is subject to an average clause.

While valuing the stock at 31st March, 2010, ₹ 1,000 were written off in respect of a slow-moving item. The cost of which was ₹ 5,000. A portion of these goods were sold at a loss of ₹ 500 on the original cost of ₹ 2,500. The remainder of the stock is now estimated to be worth the original cost. The value of goods salvaged was estimated at ₹ 20,000. The average rate of gross profit was 20% throughout. (10 marks) (Nov. 2011)
Answer:
Memorandum Trading Account for the period 1st April, 2010 to 31st August, 2010

Statement showing computation of Claim for Loss of Stock

Amount of claim to be lodged with insurance company

Working Note:

Computation of Adjusted Purchases:

Question 17.
On 27th July, 2016, a fire occurred in the godown of M/s. Vijay Exports and most of the stocks were destroyed. However, goods costing ₹ 5,000 could be salvaged. Their firefighting expenses were amounting to ₹ 1,300.
From the salvaged accounting records, the following information is available relating to the period from 1.4.2016 to 27.7.2016:

Other Information:

1. While valuing the stock on 31.1.2016, ₹ 1,000 had been written off in respect of certain slow-moving items costing ₹ 4,000. A portion of these goods were sold in June, 2016 at a loss of ₹ 700 on original cost of ₹ 3,000. The remainder of these stocks is now estimated to be worth its original cost.
2. Past record shows the normal gross profit rate is 20%.
3. The insurance company also admitted fire-fighting expenses. The Com-pany had taken the fire insurance policy of ₹ 55,000 with the average clause.

Compute the amount of claim of stock destroyed by fire, to be lodged to the Insurance Company. Also prepare Memorandum Trading Account for the period 1.4.2016 to 27.7.2016 for normal and abnormal items. (10 Marks) (Nov. 2017)
Answer:
Memorandum Trading Account for the period 1st April, 2016 to 27th July, 2016


Statement Showing computation of Claim for Loss of Stock

Amount of claim to be lodged with insurance company

Working Notes:

1. Computation of Adjusted Purchases

2. Computation of Goods with Customers
Approval for sale has not been received = ₹ 40,000 × 1/4 = ₹ 10,000.
Hence, these should be valued at cost i.e. (₹ 10,000 – 20% of ₹ 10,000)
= ₹ 8,000

3. Computation of Actual Sales

4. Computation of Wages

5. Computation of Opening Stock
Original cost of stock as on 31st March, 2017
= ₹ 63,000 + ₹ 1,000 (Amount written off)
= ₹ 64,000.

Question 18.
A fire occurred in the premises of M/s. Raxby & Co. on 30-6-2017. From the salvaged accounting records, the following particulars were ascertained:

In valuing the slock for the Balance Sheet at 31st March, 2017, ₹ 5,000 had been written off on certain stock which was a poor selling line having the cost of ₹ 8,000. A portion of these goods were sold in. May, 2017 at a loss of ₹ 1,000 on original cost of ₹ 7,000. The remainder of the stock was now estimated to be worth its original cost. Subject to that exception, gross profit had remained at a uniform rate throughout the year.
The value of the salvaged stock was ₹ 10,000. M/s. Raxby & Co. had insured their stock for ₹ 1,00,000 subject to average clause.
Compute the amount of claim to be lodged to the insurance company. (8 Marks) (May 2018)
Answer:
M/s Raxby & Co. Trading Account for 2016-17

The normal rate of gross profit to sales is = \(\frac{90,000}{6,00,000}\) × 100 = 15%
Memorandum Trading Account up to June 30, 2017

* At cost.

Computation showing amount of Insurance Claim:

Therefore, insurance claim will be limited to ₹ 91,935

Loss Of Profit — Simple Questions

Question 19.
A trader intends to take a loss of profit policy with indemnity period of 6 months; however, he could not decide the policy amount. From the following details, suggest the policy amount:

Net profit earned in last year was 10% of turnover and the same trend expected in subsequent year.
Increase in turnover expected 25%.

To achieve additions! sales, trader has to incur additional expenditure of ₹ 31,250. (4 marks) (Nov. 2010)

(a) Computation of Gross Profit
Gross Profit \(=\frac{\text { Gross Profit }+\text { Standing Charges }}{\text { Turnover }}\) × 100
= \(\frac{4,50,000+90,000}{4,50,000}\) × 100 = 30%

(b) Computation of policy amount to cover loss of profit

Therefore, the trader should go in for a loss of profit policy of ₹ 2,00,000.

Loss Of Profit — Advanced Questions

Question 20.
From the following particulars, you are required to calculate the amount of claim for B Ltd., whose business premises was partly destroyed by fire:

The subject matter of the policy was gross profit but only net profit and insured standing charges are included.
The books of account revealed:
(a) The gross profit for the financial year 2011 was ₹ 3,60,000.
(b) The actual turnover for financial year 2011 was ₹ 12,00,000 which was also the turnover in this case.
(c) The turnover for the period 1st January to 31st October, in the year preceding the loss, was ₹ 10,00,000.

During dislocation of the position, it was learnt that in November-December 2011, there has been an upward trend in business done (compared with the figure of the previous years) and it was stated that had the loss not occurred, the trading results for 2012 would have been better than those of the previous years.

The Insurance company official appointed to assess the loss accepted this view and adjustments were made to the pre-damaged figures to bring them up to the estimated amounts which would have resulted in 2012.
The pre-damaged figures together with agreed adjustments were:

Rate of Gross Profit 30% (actual for 2011), 32% (adjusted for 2012).
Increased cost of working amounted to ₹ 1,80,000.

There was a clause in the policy relating to savings in insured standard charges during the indemnity period and this amounted to ₹ 28,000.

Standing Charges not covered by insurance amounted to ₹ 20,000 p.a. The annual turnover for January was nil and for the period February to October 2012 ₹ 8,00,000. (RTP)
Answer:
1. Computation of Short sales

2. Computation of Gross profit ratio
Gross profit – Insured Standing Charges – Uninsured standing charges = Net profit
Or
Gross profit – Uninsured standing charges = Net profit +Insured Standing Charges
= 4,06,400 – 20,000 = 3,86,400

3. Amount allowable in respect of additional expenses

Least of the following:

(i) Actual expenses = 1,80,000
(ii) Gross profit on sales during 10 months period = 8,00,000 × 30.42596 = 2,43,400
(iii)

4. Computation showing amount of Claim

On the amount of final claim, the average clause will not apply since the amount of the policy ₹ 4,00,000 is higher than gross profit on annual adjusted turnover ₹ 3,86,400.
Therefore, insurance claim will be ₹ 2,22,247.

Question 21.
Monalisa & Co. runs plastic goods shop. Following details are available from quarterly sales tax return filed.

A loss of profit policy was taken for ₹ 1,00,000. Fire occurred on 15th September, 2012. Indemnity period was for 3 months. Net Profit was ₹ 1,20,000 and standing charges (all insured) amounted to ₹ 43,990 for year ending 2011.
Determine the Insurance Claim. (16 Marks) (Nov. 2013)
Answer:
(1)

(2)
Computation of Short sales
Indemnity period: 16.9.2012 to 15.12.2012
Standard sales to be calculated on basis of corresponding period of year 2011

Working Notes:

1.

2. Calculation of upward trend in sales
Total sales in year 2009 = 6,20,000
Increase in sales in year 2010 as compared to 2009 = 93,000

Thus, annual percentage increase trend is of 15%.

3. Computation of Gross profit on annual turnover

Computation Of Policy Amount

Question 22.
M/s. Platinum Jewellers wants to take up a ‘Loss of Profit Policy’ for the year 2015. The extract of the Profit and Loss Account of the previous year ended 31-12-2014 provided below:


Turnover is expected to grow by 25% next year.
To meet the growing working capital needs the partners have decided to avail overdraft facilities from their bankers @ 12% p.a. interest

The average daily overdraft balance will be around ₹ 2 lakhs.
The wages for the skilled craftsmen will increase by 20% and salaries by 10% in the current year. All other expenses will remain the same. Determine the amount of policy to be taken up for the current year by M/s. Platinum Jewellers. (6 Marks) (May 2015)
Answer:
Statement showing computation of Amount of Insurance Policy to be taken

Working Note:

Trading and Profit and Loss account for the year ended 31.12.2014

Question 23.
A firm has decided to take out a loss of profit policy for the year 2016 and given the following information for the last accounting year 2015.
Variable manufacturing expenses ₹ 14,20,000, Standing charges ₹ 1,50,000, Net Profits ₹ 80,000, Non-operating income ₹ 2,500, Sales ₹ 18,00,000.
Compute the sum to be insured in each of the following alternative cases showing the anticipation for the year 2016:

1. If sales will increase by 15%.
2. If sales will increase by 15% and only 50% of the present standing charges are to be insured.
3. If sales and variable expenses will increase by 15% and standing charges will increase by 10%.
4. If sales will increase by 15% and variable expenses will decrease by 5%.
5. If sales will increase by 10% and standing charges will increase by 15%.
6. If the turnover and standing charges will increase by 15% and variable expenses will decrease by 10%-but only 50% of the present standing charges are to be insured. (8 marks) (May 2016)

Answer:
Statement showing computation of sum insured

Notes:

1. It has been assumed that increase in sale is due to increase in volume of sales.
2. *In case (vi), it is given in the question that 50% of the present standing charges are to be insured. It is assumed that 50% of the increased standing charges are insured.
3. In case (iii), 15% increase in variable expenses has been calculated after considering proportionate increase in variable expenses due to increase in turnover.

Loss Of Stock And Profit—Comprehensive Questions

Question 24.
A Ltd. give the following Trading and Profit and Loss Account for year ended 31st December, 20X1:

Trading and Profit and Loss Account for the year ended 31st December, 20X1

The company had taken out policies both against loss of stock and against loss of profit, the amounts being ₹ 80,000 and ₹ 1,72,000. A fire occurred on 1st May, 20X2 and as a result of which sales were seriously affected for a period of 4 months. You are given the following further information:

(a) Purchases, wages and other manufacturing expenses for the first 4 months of 20X2 were ₹ 1,00,000, ₹ 50,000 and ₹ 36,000 respectively.

(b) Sales for the same period were ₹ 2,40,000.

(c)

(d) Due to rise in wages, gross profit during 20X2 was expected to decline by 2% on sales.

(e) Additional expenses incurred during the period after fire amounted to ₹ 1,40,000. The amount of the policy included ₹ 1,20,000 for expenses leaving ₹ 20,000 uncovered. Ascertain the claim for stock and for loss of profit.
All workings should form part of your answers.
Answer:
Memorandum Trading Account for the period 1st January to 1st May, 20X2

Claim for loss of Stock will be limited to ₹ 80,000 which is the amount of Insurance policy.

Working Notes:

(1) Computation of Rate of Gross Profit in 20X1
Gross Profit/Sales × 100
2,40,000/8,00,000 × 1oo = 30%
in 20X2, Gross Profit had declined by 2% as a result of rise in wages, hence the rate of Gross Profit for loss of stock is taken at 28%.
Computation of Loss of Profit

(a)

(b) Computation of Gross profit ratio
{[Net profit + Insured standing charges (20X1)]/Sales (20X1)} × 100
= 56,000 + 1,10,000/8,00,000 × 100 = 22%
Less: Expected decrease due to increase in wages 2% = 20%)

(c) Computation of Loss of Gross Profit:
20% on short sales ₹ 2,28,000 = ₹ 45,600

(d) Computation of Annual turnover (adjusted):
(12 months to 1st May, 20X2, ie., 1 May 20X1 to 30 Apr. 20X2):

(e) Amount allowable in respect of additional expenses

Least of the following:

(i) Actual expenses 1,40,000
(ii) Gross Profit on sales during indemnity period 20% of ₹ 60,000 12,000
(iii) Gross profit on annual (adjusted) turnover/Gross profit as above + Uninsured charges × Additional expenses
1,28,000/1,48,000 × 1,40,000 = 1,21,000
Least i.e. ₹ 12,000 is admissible.
Total claim for Loss of Profit: 45,600 + 12,000 = ₹ 57,600
Note:
On the amount of final claim, the average clause will not apply since the amount of the policy ₹ 1,72,000 is higher than Gross Profit on annual turnover ₹ 1,28,000.

Question 25.
S Ltd.’s Trading and profit and loss account for the year ended 31st December, 20X1 were as follows:
Trading and Profit and Loss Account for the year ended 31st Dec., 20X1

The company had taken out a fire policy for ₹ 3,00,000 and a loss of profits policy for ₹ 1,00,000 having an indemnity period of 6 months. A fire occurred on 1.4.20X2 at the premises and the entire stock were gutted with nil salvage value. The net quarter sales i.e. 1.4.20X2 to 30.6.20X2 was severely affected. The following are the other information:

The general trend of the industry shows an increase of sales by 15% and decrease in GP by 5% due to increased cost.
Ascertain the claim for stock and loss of profit.
Answer:
Trading A/c for the period 1.1.20X2 to 31.3.20X2

As the value of stock destroyed by fire is less than the policy value, the entire claim will be admitted.

Computation of loss of profit:

Computation of short sales:

Computation of G.P. Ratio:

Gross profit ratio = Net profit + Insured standing charges/Sales × 100

Loss of profit = 596 of ₹ 2,12,500 = ₹ 10,625

Amount allowable in respect of additional expenses:

Least of the following:
(i) Actual expenditure ₹ 60,000
(ii) G.R on sales generated by additional expenses 5% of ₹ 87,500 ₹ 4,375
(assumed that entire sales during disturbed period is due to additional expenses)
(iii) Additional Exp. × G.R on Adjusted Annual Turnover/G.P. as above + Uninsured Standing Charges
₹ 60,000 × 57,500/57,500 + 1,30,000 = ₹ 18,400 (approx.)
least ie. ₹ 4,375 is admissible.

Gross Profit on annual turnover:
Adjusted annual turnover:

As the gross profit on annual turnover (₹ 57,500) is less than policy value (₹ 1,00,000), average clause is not applicable.

Computation of Insurance claim to be submitted:

Note:
According to the given information standing charges include administrative expenses (₹ 80,000) ahd finance charges (₹ 1,00,000). Insured standing charges being ₹ 50,000, uninsured standing charges would be ₹ 1,30,000.

Working Note:

* Sales for the first quarter of 20X1 is computed on the basis of sales of the first quarter of 20X2.

Question 26.
Ramda & Sons had taken out policies (without Average Clause) both against loss of stock and loss of profit, for ₹ 2,10,000 and ₹ 3,20,000 respectively. A fire occurred on 1st July, 2011 and as a result of which sales were seriously affected for a period of 3 months.
Trading and Profit & Loss A/c of Ramda & Sons for the year ended on 31st March, 2011 is given below:

Further detail provided is as below:

(a) Sales, Purchases, Wages and Manufacturing Expenses for the period 1.04.2011 to 30.6.2011 were ₹ 3,36,000, ₹ 2,14,000, ₹ 51,000 and ₹ 12,000 respectively.

(b) Other Sales figure were as follows:

(c) Due to decrease in the material cost, Gross Profit during 2011-12 was expected to increase by 5% on sales.

(d) ₹ 1,98,000 were additionally incurred during the period after fire. The amount of policy included ₹ 1,56,000 for expenses leaving ₹ 42,000 uncovered. Compute the claim for stock, loss of profit and additional expenses (16 Marks) (May 2012)
Answer:
Memorandum Trading Account for the period 1st April to 1st July, 2011

Claim for loss of stock will be limited to ₹ 2,10,000 only which is the amount of Insurance policy and no average clause will be applied.

Computation of Loss of Profit

(a)

(b) Gross profit ratio

(c) Loss of Gross Profit
23% on short sales ₹ 3,10,400 = 71,392

(d) Annual turnover (12 months to 1st July, 2011):

(e) Amount allowable In respect of additional expenses

Computation of Claim

Insurance claim for loss of profit will be of ₹ 82,432 only.

Working Note:

Rate of Gross Profit in 2010-11

In 2011-12, Gross Profit is expected to increase by 5 as a result of decline in material cost, hence the rate of Gross Profit for loss of stock is taken at 30%.

Miscellaneous

Question 27.
A fire engulfed the premises of a business of M/s Preet on the morning of 1st July, 2013. The building, equipment and stock were destroyed and the salvage recorded the following:
Building – ₹ 4,000; Equipment – ₹ 2,500; Stock – ₹ 20,000. The following other Information was obtained from the records saved for the period from 1st January to 30th June, 2013:

No depreciation has been provided since December 31, 2012. The latest rate of depreciation is 5% p.a. on building and 15% p.a. on equipment by straight line method.
Normally business makes a profit of 25% on net sales. You are required to prepare the statement of claim for submission to the Insurance Company. (RTP)
Answer:
Memorandum Trading Account for the Period from 1.1.2018 to 30.6.2018

Stock Destroyed A/c

Statement Showing Computation of Claim

AS 16: Borrowing Costs – CA Inter Accounts Study Material is designed strictly as per the latest syllabus and exam pattern.

AS 16: Borrowing Costs – CA Inter Accounts Study Material

Borrowing Costs (Based On Para Nos. S And 4)

Question 1.
Briefly indicate the items which are included in the expressions ‘Borrowing Cost’ as per AS 16. (2 Marks) (Nov. 2009)
Answer:
Borrowing costs are interest and other costs incurred by an enterprise in connection with the borrowing of funds.
Borrowing cost may include:
(a) Interest and commitment charges on bank borrowings and other short term and long-term borrowings.
(b) Amortisation of discounts or premiums relating to borrowings.
(c) Amortisation of ancillary costs incurred in connection with the arrange¬ment of borrowings.
(d) Finance charges in respect of assets required under finance leases or under other similar arrangements; and
(e) Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.

Question 2.
Rutu Builders Limited has borrowed a sum of US$ 20,00,000 at the beginning of Financial year 2017-18 for its residential project at LIBOR +3%. The interest is payable at the end of the financial year.

At the time of availment exchange rate was 61 per US$ and the rate as on 31st March, 2018 was 65 per US $. If Rutu Builders Limited had borrowed the loan in India in Indian Rupee equivalent, the pricing of loan would have been @ 10.50%.

Compute Borrowing cost and exchange difference for the year ending 31st March, 2018 as per Accounting Standards 16. (Applicable LIBOR is 1%). (5 Marks) (May 2018)
Answer:
(i) Interest for the period 2017-18
= US $ 20 lakhs × 4% × ₹ 65 per US $ = ₹ 52 lakhs

(ii) Exchange Loss on principal amount
= US $ 20 lakhs × ₹ (65 – 61) = ₹ 80 lakhs.

(iii) Interest that would have resulted if the loan was taken in Indian currency
= US $ 20 lakhs × ₹ 61 × 10.5% = ₹ 128.1 lakhs

(iv) Difference between interest on local currency borrowing and foreign currency borrowing
= ₹ 128.1 lakhs – ₹ 52 lakhs = ₹ 76.1 lakhs.

Out of ₹ 80 lakhs increase in the liability towards principal amount, only ₹ 76.1 lakhs will be considered as the borrowing cost.

The remaining ₹ 3.9 lakhs (₹ 80 lakhs – ₹ 76.1 lakhs) would be considered as the exchange difference to be accounted for as per AS 11 ‘The Effects of Changes in Foreign Exchange Rates’.

Question 3.
Raj & Co. has taken a loan of US$ 20,000 at the beginning of the financial year for a specific project at an interest rate of 6% per annum, payable annually. On the day of taking loan, the exchange rate between currencies was ₹ 48 per 1 US$. The exchange rate at the closing of the financial year was ₹ 50 per 1 US$. The corresponding amount could have been borrowed by the company in Indian Rupee at an interest rate of 11% per annum. Determine the treatment of borrowing cost in the books of account. (4 Marks) (Nov 2013)
Answer:
The following computations would be made to determine the amount of borrowing costs for the purpose of AS 16 ‘Borrowing Costs’:
Interest for the period = US $ 20,000 × ₹ 50 per US $ × 6% = ₹ 60,000.
Exchange loss on principal amount
= US$ 20,000 × ₹ (50-48) = ₹ 40,000.
Interest that would have resulted if the loan was taken in Indian Currency
= US $ 20,000 × 48 × 11% = ₹ 1,05,600
Difference between interest on local currency borrowing and foreign currency borrowing
= ₹ 1,05,600 – ₹ 60,000 = ₹ 45,600 (B)
In the above case, ₹ 40,000 is less than ₹ 45,600, therefore the entire exchange difference of 40,000 would be considered as borrowing costs.

The total borrowing cost would be ₹ 100000 (₹ 60000 + ₹ 40000)

Question 4.
X Limited has borrowed a sum of US $ 10,00,000 at the beginning of Financial Year 2016-17 for its residential project at 4 %. The interest is payable at the end of the Financial Year. At the time of availment exchange rate was ₹ 56 per US $ and the rate as on 31st March, 2017 was ₹ 62 per US $. If Omega Limited borrowed the loan in India in Indian Rupee equivalent, the pricing of loan would have been 10.50%.

You are required to compute Borrowing Cost and exchange difference for the year ending 31st March, 2017 as per applicable Accounting Standards.
Answer:
(i) Interest for the period 2016-17
= US $ 10 lakhs × 4% × ₹ 62 per US$ = ₹ 24.80 lakhs

(ii) Exchange loss on principal amount
= US $ 10 lakhs × 7 (62 – 56) = ₹ 60 lakhs

(iii) Interest that would have resulted if the loan was taken in Indian currency
= US $ 10 lakhs × ₹ 56 × 10.5% = ₹ 58.80 lakhs

(iv) Difference between interest on local currency borrowing and foreign currency borrowing
= ₹ 58.80 lakhs – ₹ 24.80 lakhs = ₹ 34 lakhs.
Out of ₹ 60 lakhs increase in the liability towards principal amount, only ₹ 34 lakhs will be considered as the borrowing cost.
The remaining ₹ 26 lakhs (60 – 34) would be considered as the exchange difference to be accounted for as per AS 11.

Qualifying Asset (Based On Para Nos. 3 And 5)

Question 5.
A company capitalizes interest cost of holding investments and adds to cost of investment every year, thereby understating interest cost in profit and loss account. Comment on the accounting treatment done by the company in context of the relevant AS. (RTP)
Answer:
Investments other than investment properties are not qualifying assets as per AS-16 ‘Borrowing Costs’. Therefore, interest cost of holding such invest¬ments cannot be capitalized.

Question 6.
A company incorporated in June 2017, has setup a factory within a period of 8 months with borrowed funds. The construction period of the assets had reduced drastically due to usage of technical innovations by the company. Whether interest on borrowings for the period prior to the date of setting up the factory should be capitalized although it has taken less than 12 months for the assets to get ready for use. You are required to comment on the necessary treatment with reference to AS 16. (RTP)
Answer:
As per para 3.2 to 4S 16 ‘Borrowing Costs’, a qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.

Further, AS 16 states that what constitutes a substantial period of time primarily depends on the facts and circumstances of each case. However, ordinarily, a period of twelve months is considered as substantial period of time unless a shorter or longer period can be justified on the basis of facts and circumstances of the case.

Analysis:
In estimating the period, time which an asset takes, technologically and commercially, to get it ready for its intended use or sale is considered.

It may be implied that there is a rebuttable presumption that a 12 months period constitutes substantial period of time.

In the given case where construction period has reduced drastically due to technical innovation, the 12 months period should at best be looked at as a benchmark and not as a conclusive yardstick. It may so happen that an asset under normal circumstances may take more than 12 months to complete. However, an enterprise that completes the asset in 8 months should not be penalized for its efficiency by denying it interest capitalization and vice versa.

Conclusion:
Therefore, if the factory is constructed in 8 months then it shall be considered as a qualifying asset. The interest on borrowings for the same shall be capitalised although it has taken less than 12 months for the asset to get ready to use.

Specific And General Borrowings With Qualifying Asset Concept (Based On Para Nos. 3, 5, 10 And 12)

Question 7.
U Limited borrowed an amount of ₹ 150 crores on 1.4.2016 for construction of boiler plant @ 11% p.a. The plant is expected to be completed in 4 years. Since the weighted average cost of capital is 13% p.a., the accountant of Rainbow Ltd. capitalized ₹ 19.50 crores for the accounting period ending on 31.3.2017. Due to surplus fund out of ₹ 150 crores, income of ₹ 3.50 crores were earned and credited to profit and loss account. Comment on the above treatment of accountant with reference to relevant accounting standard. (RTP)
Answer:
Para 10 of AS 16 Borrowing Costs’ states ‘To the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation on that asset should be determined as the actual borrowing costs incurred on that borrowing during the period less any income on the temporary investment of those borrowings.

Analysis and accounting treatment:
In the given case, treatment of accountant of U Ltd. is incorrect.
The amount of borrowing costs capitalized for the financial year 2016-17 should be calculated as follows:

Question 8.
Rohini Limited has obtained loan from an Institution for ₹ 500 lacs for modernization and renovation of its plant and machinery. The installation of plant and machinery was completed on 31.3.2009 amounting to ₹ 320 lacs and ₹ 50 lacs were advanced to suppliers of additional assets and the balance of ₹ 130 lacs have been utilized for working capital requirements. Total interest paid for the above loan amounted to ₹ 65 lacs during 2008-09. You are required to state how the interest on institutional loan is to be accounted for in the year 2008-09. (2 Marks) {May 2010)
Answer:
As per AS 16 ‘Borrowing Costs \ borrowing costs that are directly attributable to the acquisition, construction or production of qualifying assets should be capitalised as part of the cost of that asset. Other borrowing costs are recognized as expense in the period in which they are incurred.

Accounting Treatment:

Question 9.
On 1st April, 2009, Amazing Construction Ltd. obtained a loan of ₹ 32 crores to be utilized as under:

Show the treatment of interest by Amazing Construction Ltd. (4 Marks) (Nov 2010)
Answer:
Accounting Treatment:

Question 10.
On 25th April, 2010, Neel Limited obtained a loan from the bank for ₹ 70 lakhs to be utilized as under:

In March, 2011, construction of shed was completed and machinery installed. Delivery of truck was not received. Total interest charged by the bank for the year ending 31st March, 2011 was ₹ 12 lakhs. Show the treatment of interest under Accounting Standard 16. (5 Marks) (Nov 2011)
Answer:
Accounting Treatment of Interest:

Question 11.
Suhana Ltd. issued 12% secured debentures of ₹ 100 Lakhs on 01.05.2013, to be utilized as under:

In March 2014, construction of the factory building was completed and machinery was installed and ready for its intended use. Total interest on debentures for the financial year ended 31.03.2014 was ₹ 11,00,000. During the year 2013-14, the company had invested idle fund out of money raised from debentures in banks’ fixed deposit and had earned an interest of ₹ 2,00,000.

Show the treatment of interest under Accounting Standard 16 and also explain nature of assets. (5 Marks) (May 2014)
Answer:
According to para 6 of AS 16 ‘Borrowing Costs’, borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalised as part of the cost of that asset. The amount of borrowing costs eligible for capitalisation should be determined in accordance with this Standard. Other borrowing costs should be recognised as an expense in the period in which they are incurred.

Also para 10 of AS 16 ‘Borrowing Costs’ states that to the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation on that asset should be determined as the actual borrowing costs incurred on that borrowing during the period less any income on the temporary investment of those borrowings.

Amount eligible for capitalization:
= ₹ 11,00,000 – ₹ 2,00,000
= ₹ 9,00,000

Question 12.
M/s. Zen Bridge Construction Limited obtained a loan of ₹ 64 crores to be utilized as under:

Show the treatment of Interest according to Accounting Standard by M/s. Zen Bridge Construction Limited. (5 Marks) (Nov 2016)
Answer:
Accounting Treatment:

Question 13.
X Limited began construction of a new plant on 1st April 2012 and obtained a special loan of 8 lakhs to finance the construction of the plant. The rate of interest on loan was 10 per cent per annum.
The expenditure that was made on the construction project of plant was as follows:

The Company’s other outstanding non – specific loan was ₹ 46,00,000 at an interest of 12 per cent per annum.

The construction of the plant was completed on 31-3-2013. You are required to calculate the amount to be capitalized including amount of interest as per the provision of AS 16 ‘Borrowing Costs’. (RTP)
Answer:
Step 1:
Computation of weighted average accumulated expenses

Step 2:
Non-specific Borrowings utilized for construction of Plant
Non-specific Borrowings = Average accumulated capital expenses – Specific borrowings
= ₹ 27,00,000 – ₹ 8,00,000 = ₹ 19,00,000

Step 3:
Interest on weighted average accumulated expenses

Step 4:
Total expenses to be capitalized for Plant

Question 14.
Axe Limited began construction of a new plant on 1st April, 2008 and obtained a special loan of ? 4,00,000 to finance the construction of the plant. The rate of interest on loan was 10%.
The expenditure that were made on the project of plant were as follows:

The company’s other outstanding non-specific loan was ₹ 23,00,000 at an interest rate of 12%.
The construction of the plant completed on 31st March, 2009.
You are required to:
(a) Calculate the amount of interest to be capitalized as per the provisions of AS 16 ‘Borrowing Cost’.
(b) Pass a journal entry for capitalizing the cost and the borrowing cost in respect of the plant. (5 Marks) (Nov 2009)
Answer:
Total expenses to be capitalised:

Working Notes :
1. Computation of average accumulated expenses

2. Amount of interest capitalised

Question 15.
M/s. Ayush Ltd. began construction of a new building on 1st January, 2014. It obtained ₹ 3 lakh special loan to finance the construction of the building on 1st January, 2014 at an interest rate of 12% p.a. The company’s other outstanding two non-specific loans were:

The expenditure that were made on the building project were as follows:

Building was completed on 31st December, 2014. Following the principles prescribed in AS 16 ‘Borrowing Cost’, calculate the amount of interest to be capitalized and pass one Journal entry for capitalizing the cost and borrowing in respect of the building. (5 Marks) (May 2015)
Answer:
(i) Computation of average accumulated expenses

(ii) Calculation of average interest rate other than specific borrowings

(iii) Interest amount eligible for capitalization

(iv) Journal Entry

Question 16.
Small Limited began construction of a building on 1st April, 2016 which is expected to cost ₹ 25,00,000. The construction of the building was financed through a special loan of ₹ 10,00,000 obtained at an interest rate of 10% per annum on 1st April, 2016. Further, expenditure on the building was financed through other non-specific finance arrangements of the company. Details of non-specific finance arrangements are as under:

Cumulative expenses incurred on the building were as follows:

Construction of the building was completed on 31st March, 2017. Following the principles specified in AS 16 ‘Borrowing Cost’, calculate the amount of interest to be capitalized. (5 Marks) (Nov 2017)
Answer:
Computation of average accumulated expenses

Non-specific Borrowings
Non-specific Borrowings = Average accumulated capital expenses – Specific borrowings
= ₹ 14,75,000 – ₹ 10,00,000 = ₹ 4,75,000

Interest amount eligible for capitalization

Working Note:
Computation of average interest rate other than for specific borrowings

Commencement, Suspension and Cessation of Borrowing Costs (Based on Para Nos. 14, 17, 19 and 21) 

Question 17.
Write short note on ‘Suspension of Capitalisation’ in context of Accounting Standard 16. (4 Marks) (May 2016)
Answer:
Capitalization of borrowing costs should be suspended during extended periods in which active development is interrupted.

Borrowing costs may be incurred during an extended period in which the activities necessary to prepare an asset for its intended use or sale are interrupted. Such costs are costs of holding partially completed assets and do not qualify for capitalization.

However, capitalization of borrowing costs is not normally suspended during a period when substantial technical and administrative work is being carried out. Capitalization of borrowing costs is also not suspended when a temporary delay is a necessary part of the process of getting an asset ready for its intended use or sale.

For example, capitalization continues during the extended period needed for inventories to mature or the extended period during which high water levels delay construction of a bridge, if such high-water levels are common during the construction period in the geographic region involved.

Basic Concepts – CA Inter Tax Study Material is designed strictly as per the latest syllabus and exam pattern.

Basic Concepts – CA Inter Taxation Study Material

Introduction

Question 1.
Answer the following with regard to the provisions of Income-tax Act, 1961.
Explain the concept of margimTrelief under the Income-tax Act, 1961. [Nov. 2008, 4 Marks]
Answer:

• Marginal relief is just reduction of tax payable.
• The Principle of marginal relief is that the additional amount of income tax with surcharge in excess of income over the specified limit will not be more than the amount in excess of specified limit.
• Where Total Income exceeds 50 lacs the amount payable as the income tax and surcharge on such income shall not exceed the total amount payable as income tax on a total income of rupees 50 lakh by more than the amount of income that exceeds ₹ 50 lacs.
• Where the Total Income exceeds one crore rupees the total amount payable as income tax and surcharge on such income will not exceed the total amount payable as income tax on the total income of one crore rupees by more than the amount of income that exceeds 1 crore rupees.

Question 2.
Answer the following with regard to the provisions of the Income-tax Act, 1961.
Explain previous year for undisclosed sources of income. [May 2009, 4 Marks]
Answer:
In certain cases the following incomes are treated as deemed income in case of undisclosed sources of income:

Particulars	Relevant Provision
Section 68	Cash Credit
Section 69	Unrecorded And Unexplained Investments
Section 69A	Unrecorded And Unexplained Money
Section 69B	Money amount of investments not fully disclosed in the books of account
Section 69C	Unexplained Expenditure
Section 69D	Hundi Borrowable and Repayments

• If total income of an assessee includes any deemed income as explained above, then it is taxable in the year of disclosure.
• It is taxable at the rate of 6096 with surcharge at the rate of 2596 and education cess at the rate of 496.
• No deduction in respect of any expenditure is or set of any law is allowed.

Question 3.
Answer the following with regard to the provisions of Income-tax Act, 1961.
Define the meaning of infrastructure capital fund as per section 2(26B) S of the Income-tax Act, 1961, [May 2009, 4 Marks]
Answer:
Infrastructure Capital Fund [Section 2(26B)]:
Infrastructure Capital Fund means such fund operating under a trust deed registered under the provisions of the Registration Act, 1908 established to raise monies by the trustees for investment by way of acquiring shares 1 or providing long-term finance to :

• An undertaking engaged in infrastructure development of infrastructure business of infrastructure facility providing telecommunication services industrial park maintenance and development generation of power reconstruction for revival of power generating plant under section 80-IA.
• Undertaking or enterprises engaged in the development of special economic zone under section 80-IAB.
• Engaged in business of developing and building housing project in section 80-IB.
• Undertaking engaged in project for construction of hospital with at least 100 beds for patients.

Question 4.
Define the term Assessee as per the Income-tax Act, 1961. [Nov. 2013, 4 Marks]
How is the term Assessee defined under the Provisions of the Income-tax Act, 1961? [May 2016, 4 Marks]
Answer:
Section 2(7)

Particulars	Relevant Provision
Section 2(7)	An assessee means A person who is liable to pay any tax or Any other sum under Income Tax Act In respect of whom any proceeding under the act has been started for the assessment of his income or Who is Deemed to be assessee under the provision of this act or Who is Deemed to be assessee in default under any provision of this act.
Meaning and Examples of Deemed Asses­see	Deemed assessee means Any person who is Deemed to be an assessee for any other person is called as deemed assessee. If any person is representing any firm or minor or lunatic is known as deemed person. If after the death of person the legal Heirs will be treated as deemed assessee.
Meaning and Examples of As­sessee in Default	Assessee in default means if any person who is responsible to do any work under this act and fails to do that work he is assessee in default. if any person who is making any payment to another person is liable to deduct income tax at source and he does not deduct any income tax or after deducting does not deposit in government account then he will become assessee in default.

Question 5.
Briefly explain the purpose for which the words Proviso and Explanation are incorporated under the various sections of the Income-tax Act, 1961. [May 2018, 2+2 = 4 Marks]
Answer:

Particulars	Relevant Provision
Proviso Meaning	an exception to the provision
Proviso Ex­ample	Provided that no tax shall be charged on the amount of gains on shares sold on a recognized stock exchange
Explanation Meaning	Explanation further clarifies the section or provides a further details
Explanation Example	HEC is levied at 4%

Question 6.
State the Elements Sources of Income Tax Law.
Answer:
Elements/Components/Sources of Income Tax Law are

• The Income-tax Act, 1961
• Finance Act
• The Income-tax Rules, 1962
• Circular and notifications from Central Board of Direct Taxes
• Supreme Court and High Court decisions only on question of law

Question 7.
One of the exceptions to the rule “that the income of the previous year shall be assessed in the subsequent assessment year is the shipping business of non-resident”.
Discuss briefly the assessment aspect of the income from shipping business.
Answer:
There are certain exceptions and shipping business of non-resident is governed by section 172.

• An assessee being non-resident either the owner of a ship or has Chartered the ship.
• Ship carries passengers or livestock or goods at a port in India.
• 7.5% of the amount of caries including Demurrage Charges and handling charges paid or payable will be deemed as income of the assessee under section 44B.
• The master of the ship will pay the tax and filed the return before the departure of the ship or can make arrangements for payment of such tax within 30 days of departure of the ship.
•  It is mandatory.

Question 8.
Explain the term substantial interest defined in Section 2(32) and its application in at least two situations.
Answer:
Substantial interest means

Particulars	Relevant Provision
For Non-Cor­porate Entity	Entity person holding 20% or more shares of the profit. In case of company the person who is holding 20% or more voting rights.
Example	If husband and wife both are having substantial interest in a company or firm for concern and receiving any remu­neration from that concern then it will be clubbed in the hands of spouse having higher total income before clubbing such income. If any spouse is getting any remuneration by doing work of non-professional nature then the income from a such concern in which his spouse has substantial interest then such remuneration is taxable in the hands of person who has substantial interest.

Question 9.
Explain the following concepts
Tax Planning, Tax Avoidance, Tax Evasion
Answer:
Tax planning

• The analysis of a financial situation or plan from a tax perspective.
• The purpose of tax planning is to ensure tax efficiency.
• Reduction of tax liability and maximizing the ability to contribute to retirement plans are crucial for success.
• With the help of tax planning, one can ensure that all elements of a financial plan can function together with maximum tax-efficiency.
• Tax planning is a significant component of a financial plan.

Tax avoidance

• The use of legal methods to minimize the amount of income tax owed by an individual or a business.
• This is generally accomplished by claiming as many deductions and credits as is allowable.
• It may also be achieved by prioritizing investments that have tax advantages, such as buying municipal bonds.
• Tax avoidance is not the same as tax evasion which relies on illegal methods such as underreporting income and falsifying deductions

Tax evasion

• An illegal activity in which a person or entity deliberately avoids paying a true tax liability.
• Those caught evading taxes are generally subject to criminal charges and substantial penalties.

Profit or Loss Pre and Post Incorporation – CA Inter Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

Profit or Loss Pre and Post Incorporation – CA Inter Accounts Study Material

Theory Questions

Question 1.
What are the purposes for which Pre-incorporation Profit & Pre-incorporation Losses can be used for? (4 Marks) (Nov. 2016)
Answer:
Purposes for which pre-incorporation profits and pre-incorporation losses can be used are as follows:

Computation Of Ratio

Question 2.
From the following information, calculate the Ratio of Sales in each case separately:
(a)

1. Date of acquisition – 1st April, 2015; date of incorporation – 1st July, 2015 and date of closing the books of account – 31st March, every year.
2. The sales for the year ending on 31 st March ,2016 were ₹ 24,00,000 of which ₹ 4,80,000 goods were sold during the first six months of the accounting period.

(b)

1. The accounts were made up to 31st December, 2015. The company was incorporated on 1st May, 2015 to takeover a business from the preceding 1st January.
2. Total sales for the year were ₹ 12,00,000. It is ascertained that the sales for November and December are one and half times the average of those for the year, whilst those for February and April are only half the average.

(c)

1. Fema Ltd. was incorporated on 1st July, 2015 to take the existing business of X from 1st April, 2015. Date of closing the books of account – 31st March, 2016.
2. Monthly sales in April 2015, February 2016 and March 2016 are double the average monthly sales for remaining months of the year. (RTP)

Answer :
(a) Sales of first 6 months = ₹ 4,80,000. Average sale of first 6 months = ₹ 4,80,000/6 = ₹ 80,000 per month. Pre-incorporation period consist of 3 months (ie., April, May and June). The sales of those 3 months = ₹ 80,000 × 3 = ₹ 2,40,000. Sales of remaining 9 months = ₹ 24,00,000 – ₹ 2,40,000 = ₹ 21,60,000.
Therefore, the ratio of sales = ₹ 2,40,000 : ₹ 21,60,000 or 1 : 9.

(b) Let the average of monthly sales = x. The sales of different months can be shown as follows:

Date of incorporation is May, 2015 Pre-incorporation period is from January to April i.e. 3x
Post-incorporation period is from May to December i.e. 9x
The ratio of Sales = 3x: 9x or 1:3.

(c) Let the average monthly sales be x. The sales of different months can be shown as follows:

Date of incorporation is 1 July, 2015. Pre-incorporation period is from April to June ie. 4x Post-incorporation period is from July to March i.e. 11x. The ratio of Sales = 4x: 11x or 4 : 11

Question 3.
M Ltd. was incorporated on 1.8.2016 to takeover the running business of M/s A with assets from 1.4.2016. The accounts of the company were closed on 31.3.2017.
The average monthly sales during the first four months of the year (2016-17) was twice the average monthly sales during each of the remaining eight months.
You are required to compute time ratio and sales ratio for pre and post incorporation periods.
Answer:
Computation of Time ratio:
Pre-incorporation period (1.4.2016 to 1.8.2016) = 4 months
Post-incorporation period (1.8.2016 to 31.3.2017) = 8 months
Time ratio = 4 : 8 or 1 : 2

Computation of Sales ratio:

Average monthly sale before incorporation was twice the average sale per month of the post incorporation period. If weightage for each post-incorporation month is x, then
Weighted sales ratio = 4 × 2x : 8 × 1x = 8x : 8x or 1 : 1

Simple Problems

Question 4.
The Business carried on by Kapil under the name ‘K’ was taken over as a running business with effect from 1st April, 2016 by S Ltd., which was incorporated on 1st July, 2016. The same set of books was continued since there was no change in the type of business and the following particulars of profits for the year ended 31st March, 2017 were available.

The purchase price (including carriage inwards) for the post-incorporation period had increased by 10 per cent as compared to pre-incorporation period. No stocks were carried either at the beginning or at the end.

You are required to draw up a statement showing the amount of pre and post-incorporation period profits stating the basis of allocation of expenses. (RTF)
Answer:
Statement showing the computation of profits/losses for pre-incorporation and Post-incorporation period profits for the year ended 31st March, 2017

Working Notes:

1. Sales Ratio = 10,000:40,000 = 1 : 4
2. Time Ratio = 3 : 9 = 1 : 3
3. Purchase Price Ratio
   ∴ Ratio is 3: 9
   But purchase price was 10% higher in the company period
   ∴ Ratio is 3: 9 + 10%
   3:9.9 = 1:3.3.

Question 5.
L Ltd. was incorporated on 1st July, 2017 to acquire a running business of F goods with effect from 1st April, 2017. During the year 2017-18, the total sales were ₹ 48,00,000 of which ₹ 9,60,000 were for the first six months. The Gross profit of the company ₹ 7,81,600. The expenses debited to the Profit & Loss Account included:

1. Director’s fees ₹ 60,000
2. Bad debts ₹ 14,400
3. Advertising ₹ 48,000 (under a contract amounting to ₹ 4,000 per month)
4. Salaries and General Expenses ₹ 2,56,000
5. Preliminary Expenses written off ₹ 20,000
6. Donation to a political party given by the company ₹ 20,000.

Prepare a statement showing pre-incorporation and post-incorporation profit for the year ended 31st March, 2018. (RTP)
Answer :
Statement showing the computation of Profits for the pre-incorporation and post-incorporation periods For the year ended 31st March, 2018

Working Notes:

1. Computation of Sales ratio

Thus, Sales Ratio = 1 : 9

2. Computation of Time ratio
1st April, 2017 to 30 June, 2017: 1st July, 2017 to 31st March, 2018 = 3 months: 9 months = 1: 3
Thus, Time Ratio is 1: 3

Question 6.
A firm M/s. Alag, which was carrying on business from 1st July, 2010 gets itself incorporated as a company on 1st November, 2010. The first accounts are drawn upto 31st March, 2011. The gross profit for the period is ₹ 56,000. The general expenses are ₹ 14,220; Director’s fee ₹ 12,000 p.a.; Incorporation expenses ₹ 1,500. Rent upto 31st December was ₹ 1,200 p.a. after which it is increased to ₹ 3,000 p.a. Salary of the manager, who upon incorporation of the company was made a director, is ₹ 6,000 p.a. His remuneration thereafter is included in the above figure of fee to the directors.

Give profit and loss account showing pre and post incorporation profit. The net sales are ₹ 8,20,000, the monthly average of which for the first four months is one-half of that of the remaining period. The company earned a uniform profit. Interest and tax may be ignored. (6 Marks) (Nov. 2011)
Answer:
Profit & Loss Account for 9 months ended on 31st March, 2011

Working Notes:

1. Computation of sales ratio
Let the average monthly sales of first four months = 100 and next five months = 200 ”
Total sales of first four months = 100 × 4 = 400 and total sales of next five months = 200 × 5 = 1,000
The ratio of sales = 400: 1,000 =2: 5

2. Allocation of Rent
Till 31st December, 2010, rent was ₹ 1,200p.a. i.e. ₹ 100p.m.So, Pre-incorporation rent = ₹ 100 × 4 months = ₹ 400
Post-incorporation rent = (₹ 100 × 2 months) + (₹ 250 × 3 months) = ₹ 950

Question 7.
The promoters of Glorious Ltd. took over on behalf of the company a running business with effect from 1 st April, 2012. The company got incorporated on 1st August, 2012. The annual accounts were made up to 31st March, 2013 which revealed that the sales for the whole year totalled ₹ 1,600 lakhs out of which sales till 31 st July, 2012 were for ₹ 400 lakhs. Gross profit ratio was 25%.

The expenses from 1st April 2012, till 31st March, 2013 were as follows:

Prepare a statement showing the calculation of Profits for the pre-incorporation and post-incorporation periods. (8 Marks) (May 2013)
Answer:
Statement showing the computation of Profits for the pre-incorporation and post-incorporation periods

Working Notes:

1. Computation of Sales ratio

Thus, sale ratio = 400:1200
= 1:3

2. Computation of Time ratio
1st April, 2012 to 31st July, 2012: 1st August, 2012 to 31st March, 2013
= 4 months: 8 months = 1:2
Thus, time ratio is 1:2.
* Audit fee has been assumed to be related with tax audit and therefore apportioned into pre and post-incorporation periods on the basis of turnover.

Question 8.
Sneha Ltd. was incorporated on 1st July, 2013 to acquire a running business of Atul Sons with effect from 1st April, 2013. During the year 2013-14, the total sales were ₹ 24,00,000 of which ₹ 4,80,000 were for the first six months. The Gross profit of the company ₹ 3,90,800. The expenses debited to the Profit & Loss Account included:

1. Director’s fees ₹ 30,000
2. Bad debts ₹ 7,200
3. Advertising ₹ 24,000 (under a contract amounting to 12,000 per month)
4. Salaries and General Expenses ₹ 1,28,000
5. Preliminary Expenses written off ₹ 10,000
6. Donation to a political party given by the company ₹ 10,000.

Prepare a statement showing pre-incorporation and post-incorporation profit for the year ended 31st March, 2014. (8 Marks) (May 2014)
Answer :
Statement showing the computation of Profits for the pre-incorporation and post-incorporation periods
For the year ended 31st March, 2014

Working Notes:

1. Computation of Sales ratio

Thus, Sales Ratio = 1:9

2. Computation of Time ratio
1st April, 2013 to 30 June, 2013: 1st July, 2013 to 31st March, 2014
= 3 months: 9 months =1:3 Thus, Time Ratio is 1: 3

Question 9.
The promoters of Shiva Ltd. took over on behalf of the company a running business with effect from 1st April 2017. The company got incorporated on 1st August, 2017. The annual accounts were made up to 31st March, 2018 which revealed that the sales for the whole year totalled ₹ 2400 lakhs out of which sales till 31st July, 2017 were for ₹ 600 lakhs. Gross profit ratio was 20%.

The expenses from 1st April, 2017, till 31st March, 2018 were as follows:

Prepare a statement showing the calculation of profits for the pre-incorporation and Post incorporation periods. (10 Marks) (May 2018)
Answer:
Statement showing the computation of Profits for the pre-incorporation and post-incorporation periods

Working Notes:

1. Computation of Sales ratio

Thus, sale ratio = 600:1800 = 1:3

2. Computation of Time ratio
1st April, 2017 to 31st July, 2017: 1st August, 2017 to 31st March, 2018 = 4 months: 8 months = 1:2, Thus, time ratio is 1 : 2.

Question 10.
Sun Limited took over the running business of a partnership firm M/s A & N Brothers with effect from 1 st April, 2017. The company was incorporated on 1st September, 2017. The following profit and loss account have been prepared for the year ended 31st March, 2018.

Additional Information:

1. Trend of sales during April, 2017 to March, 2018 was as under:
   
2. Sun Limited took over a machine worth ₹ 7,20,000 from A&N Brothers and purchased a new machine on 1st February, 2018 for ₹ 4,80,000. The company decides to provide depreciation @ 10% p.a.
3. The company occupied additional space from 1st October, 2017 @ rent of ₹ 6,000 per month.
4. Out of travelling expenses, ₹ 30,000 were incurred by office staff while remaining expenses were incurred by salesmen.
5. Audit fees pertains to the company.
6. Salaries were doubled from the date of incorporation.

You are required to prepare a statement apportioning the expenses between pre and post-incorporation periods and calculate the profit/ (loss) for such periods.
Answer:
Statement showing computation of profits forpre and post incorporation periods for the year ended 31.3.2018

Working Notes:

1. Computation of Time Ratio
Pre-incorporation period = 1st April, 2017 to 31st August, 2017 ie. 5 months
Post-incorporation period is 7 months
Time ratio is 5: 7.

2. Computation of Sales ratio

5,00,000 : 10,00,000 = 1 : 2

3. Allocation of Travelling expenses

4. Allocation of Rent

5. Allocation of Salaries

Suppose x for a month in pre-incorporation period then salaries for pre- incorporation period = 5x salaries for post-incorporation period = 2x × 7= 14x
Ratio = 5:14

6. Allocation of Depreciation

Advanced Problems

Question 11.
The partnership of Seva Agencies decided to convert the partnership into Private Limited Company named S Pvt. Ltd. with effect from 1st January, 2014. The consideration was agreed at ₹ 2,34,00,000 based on firm’s Balance Sheet as on 31st December, 2013. However, due to some procedural difficulties, the company could be incorporated only on 1st April, 2014. Meanwhile, the business was continued on behalf of the company and the consideration was settled on that day with interest at 12% p.a. The same books of account were continued by the company, which closed its accounts for the first time on 31st March, 2015 and prepared the following summarized Profit and Loss account:

The company’s only borrowing was a loan of ₹ 1,00,00,000 at 12% p.a. to pay the purchase consideration due to the firm and for working capital requirements. The company was able to double the monthly average sales of the firm from 1st April, 2014, but the salaries trebled from the date. It had to occupy additional space from 1st July, 2014 for which rent was ₹ 60,000 per month.

Prepare a statement showing apportionment of costs and revenue between pre-incorporation and post-incorporation periods. (RTP)
Answer:
Statement showing computation of profits for pre and post incorporation periods for the year ended 31.3.15 (15 Months)

Working Notes:

(6) Computation of Gross Profit

Trading Account

Question 12.
The partners of PQ Enterprises decided to convert the partnership firm into a Private Limited Company PQ (P) Ltd. with effect from 1st January, 2015. However, company could be incorporated only on 1st June, 2015. The business was continued on behalf of the company and the consideration of ₹ 6,00,000 was settled on that day along with interest @ 12% per annum. The company availed loan of ₹ 9,00,000 @ 10% per annum on 1st June, 2015 to pay purchase consideration and for working capital. The company closed its accounts for the first time on 31st March, 2016 and presents you the following summarized profit and loss account:

Sales from June, 2015 to December, 2015 were 2/times of the average sales, which further increased to 3/times in January to March quarter, 2016. The company recruited additional work force to expand the business. The salaries from July, 2015 doubled. The company also acquired additional showroom at monthly rent of ₹ 10,000 from July, 2015.

You are required to prepare a statement showing apportionment of cost and revenue between pre-incorporation and post-incorporation periods. Also suggest the purposes for which Pre-incorporation Profit & Pre-incorporation Losses can be used for. (RTP)
Answer:
Profit and Loss Account for 15 months ended 31st March, 2016

Working Notes:

1. Computation of sales ratio
Let the average sales per month in pre-incorporation period be x
Average Sales (Pre-incorporation) = x ₹ 5 = 5x
Sales (Post incorporation) from June to December, 2015 = 21/2 × ₹ 7 = 17.5x
From January to March, 2016 = 31/2 × ₹ 3 = 10.5x
Total Sales 28.0x
Sales ratio of pre-incorporation & post-incorporation is 5x: 28x

2. Computation of ratio for salaries
Let the average salary be x
Pre-incorporation salary = x ₹ 5 = 5x
Post-incorporation salary
June, 2015 = x
July to March, 2016 = x ₹ 9 X 2 = 18x
19x
Ratio is 5: 19

3. Allocation of Rent
₹
Total rent 1,35,000
Less: Additional rent for 9 months @ ₹ 10,000 p.m. 90,000

4. Allocation of interest

Question 13.
R & S working in partnership, registered a joint stock company under the name of RS Ltd. on May 31st 2017 to take over their existing business. The summarized Profit & Loss A/c as given by RS Ltd. for the year ending 31st March, 2018 is as under:
RS Ltd.
Profit & Loss Account for the year ending March 31, 2018

Prepare a Statement showing allocation of expenses & calculation of pre-incorporation & post-incorporation profits after considering the following information:

1. GP ratio was constant throughout the year.
2. Depreciation includes ₹ 1,250 for assets acquired in post incorporation period.
3. Bad debts recovered amounting to ₹ 14,000 for a sale made in 2014-15 has been deducted from bad debts mentioned above.
4. Total sales were ₹ 18,00,000 of which ₹ 6,00,000 were for April to September.
5. Happy Ltd. had to occupy additional space from 1st Oct. 2017 for which rent was ₹ 2,400 per month. (RTF)

Answer:
Statement showing computation of profit/losses for pre and post incorporation periods

Working Notes:

1. Computation of Sales ratio Sales from April to September = 6,00,000(1,00,000p.m.on average basis)
   Oct. to March = ₹ 12,00,000 (2,00,000 p.m. on average basis)
   Thus, sales for pre-incorporation = ₹ 2,00,000 period
   post-incorporation period = ₹ 16,00,000
   Sales are in the ratio of 1:8
2. Depreciation of ₹ 18,000 divided in the ratio of 1:5 (time basis) and ₹ 1,250 charged to post incorporation period.
3. Bad debt recovery of ₹ 14,000 is allocated in pre-incorporation period, being sale made in 2014-15.
4. Rent
   

Question 14.
Rama Udyog Limited was incorporated on August 1, 2008. It had acquired a running business of Rama & Co. with effect from April 1, 2008. During the year 2008-09, the total sales were ₹ 36,00,000. The sales per month in the first half year were half of what they were in the later half year. The net profit of the company, ₹ 2,00,000 was worked out after charging the following expenses:

1. Depreciation ₹ 1,08,000,
2. Audit fees ₹ 15,000,
3. Directors’ fees ₹ 50,000,
4. Preliminary expenses ₹ 12,000,
5. Office expenses ₹ 78,000,
6. Selling expenses ₹ 72,000 and
7. Interest to vendors upto August 31, 2008 ₹ 5,000.

Please ascertain pre-incorporation and post-incorporation profit for the year ended 31st March, 2009. (6 Marks) (Nov. 2009)
Answer :
Statement showing computation of pre and post incorporation profit for the year ended 31st March, 2009

Working Notes:

1. Computation of Sales ratio
The sales per month in the first half year were half of what they were in the later half year. If in the later half year, sales per month is Re. 1 then it should be 50 paise per month in the first half year. So, sales for the first four months (ie. from 1st April, 2008 to 31st July, 2008) will be 4 × .50 = ₹ 2 and for the last eight months (ie. 221 from 1st August, 2008 to 31st March, 2009) will be (2 × .50 + 6 × 1) = ₹ 7. Thus, sales ratio is 2:7.

2. Computation of Time ratio
1st April, 2008 to 31st July, 2008: 1st August, 2008 to 31st March, 2009 = 4 months: 8 months = 1:2
Thus, time ratio is 1:2.

3. Computation of Gross profit
Gross profit = Net profit + All expenses
= ₹ 2,00,000 + ₹ (1,08,000 + 15,000 + 50,000 + 12,000 + 78,000 + 72,000 + 5,000)
= ₹ 2,00,000 + ₹ 3,40,000 = ₹ 5,40,000.

Question 15.
The partners of Shri Enterprises decided to convert the partnership firm into a Private Limited Company Shreya (P) Ltd. with effect from 1st January, 2008. However, company could be incorporated only on 1st June, 2008. The business was continued on behalf of the company and the consideration of ₹ 6,00,000 was settled on that day along with summarized profit and loss account:

Sales from June, 2008 to December, 2008 were 2‘/2 times of the average sales, which further increased to 3’/2 times in January to March quarter, 2009. The company recruited additional work force to expand the business. The salaries from July, 2008 doubled. The company also acquired additional showroom at monthly rent of ₹ 10,000 from July, 2008.

You are required to prepare a Profit and Loss Account showing apportionment of cost and revenue between pre-incorporation and post-incorporation periods. Also suggest how the pre-incorporation profits/losses are to be dealt with. (10 Marks) (Nov. 2010)
Answer:
Profit and Loss Account for 15 months ended 31st March, 2009

Working Notes:

1. Computation of sales ratio:
Let the average sales per month in pre-inoiporatiun period be x Average Sales
(Pre-incorporation) = x × 5 = 5x
Sales (Post-incorporation) from June to December, 2008 = 21/2x × 7 = 17.5x
From January to March. 2009 = 31/2 × 3 = 10.5x
Total Sales 28.0x
Sales ratio of pre-incorporation & post-incorporation is 5x: 28x

2. Computation of ratio for salaries
Let the average salary be x
Pre-incorporation salary x = x × 5 = 5x
Post incorporation salary
June, 2008 = x
July to March, 2009 = x × 9 × 2
= 18x
19x

3.

4.

Question 16.
The partners Karnal and Vimal decided to convert their existing partnership business Into a Private Limited Company called M /s. KV Trading Private Ltd. with effect from 1-7-2014.
The same books of account were continued by the company which closed its account for first term on 31-3.2015.
The summarized Profit and Loss Account for the year ended 31-3-2015 is below:

The following additional information was provided:

1. The average monthly sales doubled from 1-7-2014. GP ratio was constant.
2. All investments were sold on 31-5-2014.
3. Average monthly salary doubled from 1-10-2014.
4. The company occupied additional space from 1-7-2014 for which rent of ₹ 20,000 per month was incurred.
5. Bad debts recovered amounting to ₹ 50,000 for a sale made in 2012, has been deducted from bad debts mentioned above.
6. Audit fees pertains to the company.

Prepare a statement apportioning the expenses between pre and post incorporation periods and calculate the Profit/Loss for such periods. Also suggest how the pre-incorporation profits are to be dealt with. (10 Marks) (May 2015)
Answer:
Statement showing computation of profit/loss for pre and post incorporation periods

Noie: ₹ 8.79 lakhs pre-incorporation profit is a capital profit and will be transferred to Capital Reserve.

Working Notes:

1. Computation of Sales Ratio
Let the average sales per month be x
Total sales from 01.04.2014 to 30.06.2014 will be 3x
Average sales per month from 01.07.2014 to 31.03.2015 will be 2x
Total sales from 01.07.2014 to 31.03.2015 will be 2x × 9 = 18x
Ratio of Sales will be 3x: 18x ie. 3:18 or 1:6

2. Computation of time ratio
Ratio 3 Months: 9 Months i.e. 1:3

3. Allocation of Salary
Let the salary per month from 01.04.2014 to 30.09.2014 is x
Salary per month from 01.10.2014 to 31.03.2015 will be 2x
Hence, pre-incorporation salary (01.04.2014 to 30.06.2014) = 3x
Post-incorporation salary from 01.07.2014 to 31.03.2015 = (3x + 12x) i.e.15x
Ratio for division 3x: 15x or 1:5

4.

Question 17.
Roshani & Reshma working in partnership, registered a joint stock company under the name of Happy Ltd. on May 31st 2016 to take over their existing business. The summarized Profit & Loss A/c as given by Happy Ltd. for the year ending 31st March, 2017 is as under:
Happy Ltd.
Profit & Loss A/c. for the year ending March 31, 2017

Prepare a Statement showing allocation of expenses & calculation of pre-incorporation & post-incorporation profits after considering the following information:

1. GP ratio was constant throughout the year.
2. Depreciation includes ₹ 1,250 for assets acquired in post incorporation period.
3. Bad debts recovered amounting to ₹ 14,000 for a sale made in 2013-14 has been deducted from bad debts mentioned above.
4. Total sales were ₹ 18,00,000 of which ₹ 6,00,000 were for April to September.
5. Happy Ltd. had to occupy additional space from 1st Oct. 2016 for which rent was ₹ 2,400 per month. (8 Marks) (May 2017)

Answer :
Statement showing computation of profit/losses for pre and post incorporation periods


* Pre-incorporation profit will be transferred to Capital Reserve.

Working Notes:

(i) Computation of Sales ratio
Sales from April to September = ₹ 6,00,000 (1,00,000 p.m. on average basis)
Oct. to March = ₹ 12,00,000 (2,00,000 p.m. on average basis)
Thus, sales for pre-incorporation period = ₹ 2,00,000
post-incorporation period = ₹ 16,00,000
Sales are in the ratio of 1:8

(ii) Depreciation of ₹ 18,000 divided in the ratio of 1:5 (time basis) and ₹ 1,250 charged to post incorporation period.

(iii) Bad debt recovery of ₹ 14,000/- is allocated in pre-incorporation period, being sale made in 2013-14.

(iv) Rent

Question 18.
A partnership firm M/s. Nice Sons was carrying on business from 1st May, 2017. The partners of the firm decided to convert the partnership firm into a private company called Zenith (P) Ltd. with effect from 1st September, 2017. The annual accounts were drawn upto 31st March, 2018. The summarized Profit and Loss Account from 1st May, 2017 to 31st March, 2018 is as follows:

Additional information Provided:

1. The company’s only borrowing was a loan of ₹ 15,00,000 at 9% p.a., to pay the purchase consideration due to the firm and for working capital requirements. The loan wras taken on 1st September, 2017.
2. The company occupied additional space from 1st September, 2017 for which rent of ₹ 8,000 per month was incurred.
3. Audit fee pertains to the company.
4. Bad debts recovered amounting to ₹ 36,000 for a sale made in June 2017, has been deducted from bad debts mentioned above.
5. All investments were sold in August 2017.
6. Zenith (P) Ltd. initiated an advertising campaign on 1st September, 2017, which resulted increase in monthly average sales by 40%.
7. The salary of Manager was increased by ₹ 3,000 p.m. from 1st July, 2017.

Prepare a statement showing pre-incorporation and post-incorporation profit for the year ended 31st March, 2018. (8 Marks) (May 2018)
Answer:
Statement showing computation of profit/loss for pre and post incorporation periods

Working Notes:

1. Computation of Sales Ratio
Let the average sales per month be x
Total sales from 01.05.2017 to 31.08.2017 will be 4x
Average sales per month from 01.09.2017 to 31.03.2018 will be 1.4x
Total sales from 01.09.2017 to 31.03.2018 will be 1.4x × 7 =9.8x
Ratio of Sales will be 4x: 9.8x =1:2.45

2. Computation of time Ratio
4 Months: 7 Months i.e. 4:7

3. Allocation of Manager Salary

4.

5. Allocation of Interest
Company’s Borrowing Interest = 3,15,00,000 × 9% × 7/12 = 3,78,750
Interest for Pre-incorporation period = 3,1,25,000 – 78,750 = 3,46,250

Redemption of Debentures – CA Inter Accounts Study Material is designed strictly as per the latest syllabus and exam pattern.

Redemption of Debentures – CA Inter Accounts Study Material

Important Notes:

1. In every question where a mention is given w.r.t. D.R.R. we need to create 25% DRR on 18 day of the year
2. Sinking Fund Investment is now called D.R. Fund Investments.
3. Own Debentures concept has been deleted.
4. Circumulative fund concept deleted. (Only non-circumulative concept is therefor exams) Thus, interest on fund invest forward to P&L A/c.
5. Profit on cancellation of debentures will be transferred to P&L A/c.
6. Premium on redemption of debentures transfered to P&L DR Fund
7. Gain on sale of investments will be transfered to P&L.

Theory Questions

Question 1.
Noida Toll Bridge Corporation Ltd. (an infrastructure Company) issued 100 lakhs 10% Debentures of ₹ 100 each on 1st April, 2013 due for redemption on 31st March, 2014 at 10% Premium. How much minimum amount should be credited to Debenture Redemption Reserve as per the MCA clarification? Also state the amount required to be deposited/invested in the year of redemption. Record necessary entries for redemption of debentures. (RTP)
Answer:
According to Section 117C of Companies Act, where a company issues debenture after the commencement of this Act, it shall create a debenture redemption reserve for the redemption of such debentures, to which adequate amounts shall be credited, out of its profits every year until such debentures are redeemed.

Ministry of Corporate Affairs has made a clarification on adequacy of Debenture Redemption Reserve (DRR) vide Circular No. 04/2013, dated 11 February, 2013.

As per this clarification, adequacy of Debenture Redemption Reserve (DRR) for debentures issued by companies including manufacturing and infrastructure companies is 25% of the value of debentures issued through public issue. Therefore, minimum amount of DRR will be ₹ 25 crores i.e. 25% of 100 crores in the case of Noida Toll Bridge Corporation Ltd.

Further, every company required to create/maintain DRR shall before the 30th day of April of each year, deposit or invest, as the case may be, a sum which shall not be less than fifteen percent of the amount of its debentures maturing during the year ending on the 31 st day of March next following in any one or more of the following methods, namely:
(a) in deposits with any scheduled bank, free from charge or lien;
(b) in unencumbered securities of the Central Government or of any State Government;
(c) in unencumbered securities mentioned in clauses (a) to (d) and (ee) of section 20 of the Indian Trusts Act, 1882;
(d) in unencumbered bonds issued by any other company which is notified under clause (/) of section 20 of the Indian Trusts Act, 1882;

Accordingly, Noida Toll Bridge Corporation Ltd., have to deposit/invest ₹ 15 crores (100 × 15%) in any of the abovementioned categories.

Question 2.
Comment on adequacy of Debenture Redemption Reserve (DRR) w.r.t. following: Debentures issued by-
(i) All India Financial Institutions regulated by Reserve Bank of India and Banking Companies.
(ii) For other Financial Institutions within the meaning given in the Companies Act.
(iii) For debentures issued by NBFCs registered with the RBI.
(iv) For debentures issued by other companies including manufacturing and infrastructure companies. (4 Marks) (May 2015)
Answer:

S.No.	Particulars	Adequacy of Debenture Redemption Reserve (DRR)
(i)	For debentures issued by All India Financial Institutions (AIFIs) regulated by Reserve Bank of India.	No DRR is required
(ii)	For other Financial Institutions (FIs) within the meaning given in the Companies Act.	25% of the value of debentures issued through public issue. No DRR is required in the case of privately placed debentures.
(iii)	For debentures issued by NBFCs registered with the RBI.	25% of the value of debentures issued through public issue. No DRR is required in the case of privately placed debentures.
(iv)	For debentures issued by other companies including manufacturing and infrastructure companies.	For listed companies 25% of the value of debentures issued through public issue. Also 25% DRR is required in the case of private placement of the value of debentures. For unlisted companies-issuing debentures on private placement basis, the DRR will be 25% of the value of debentures.

Question 3.
Mention the ways by which Redeemable Debentures may be redeemed under the Companies Act, 2013. (4 Marks) (May 2016)
Answer:
Redemption of debentures must be done according to the terms of issue of debentures and any deviation will be treated as a default by the company.
Redemption by paying off the debt on account of debentures issued can be done in one of the following four methods viz
(a) By payment in lump sum at the end of a specified period of time;
(b) By payment in annual instalments;
(c) By purchasing its own debentures in the open market.
(d) By conversion into shares in full or in part depending on the terms of issue.

Question 4.
Himalayas Ltd. had ₹ 10,00,000, 8% Debentures of ₹ 100 each as on 31st March, 2011. The company purchased in the open market following debentures for immediate cancellation:
On 01-07-2011 – 1,000 debentures @ ₹ 97 (cum-interest)
On 29-02-2012 – 1,800 debentures @ ₹ 99 (ex-interest)
Debenture interest due date is 30th September and 31st March.
Give Journal Entries in the books of the company for the year ended 31st March, 2012. (8 Marks) (Nov. 2012)
Answer:
Journal Entries

Open Market Purchase – Own Debentures Only

Question 5.

1. X Ltd. has issued 10,000 12% Debentures of ₹ 700 each on 1-1-20X1. These debentures are redeemable after 3 years at a premium of ₹ 5 per debenture. Interest is payable annually.
2. On October 1, 20X2, it buys 1,500 debentures from the market at ₹ 98 per debenture. These are sold away on June 30, 20X3 at ₹ 705 per debenture.
3. On January 1, 20X3 it buys 1,000 debentures at ₹ 104 per debenture from the open market. These are cancelled on April 1, 20X3.
4. On October 1, 20X3 it buys 2,000 debentures at ₹ 106 per debenture from the open market. These debentures along with other debentures are redeemed on 31st December, 20X3.

Prepare the relevant Ledger Accounts showing the above transactions. Workings should form part of your answer. Also show the extracts of statement of profit & loss own Debenture Account for the year 20X1, 20X2, 20X3.
(Note : This concept has been deleted for Nov. 2019 attempt. Please wait for clarification for May 2020 attempt. Thus, the section has been retained.)
Answer:
Own Debentures A/c


* 1,57,500 – 1,47,000
** 1,500 × 105

Assumption:
All transactions are ex-interest.

Debenture Interest A/c

* (10,000- 1,000 – 2,000) × 100

Profit & Loss (Extract) for the year 20X1

Profit & Loss (Extract) for the year 20X2

Profit & Loss (Extract) for the year 20X3

Premium on Redemption of Debentures A/c

12% Debentures A/c

Working Notes
(i) Interest paid on purchase of own debentures:

(ii) Interest credited to Interest on Own Debenture A/c

Question 6.
M Ltd. furnishes the following summarized Balance Sheet as at 31st March, 2012:

1. The company passed a resolution to buy-back 20% of its equity capital @ ₹ 15 per share. For this purpose, it sold its investments of ₹ 30 lakhs for ₹ 25 lakhs.
2. The company redeemed the preference shares at a premium of 10% on 1st April, 2012.
3. Included in its investments were ‘Investments in own debentures’ costing ₹ 3 lakhs (face value ₹ 3.30 lakhs). These debentures were cancelled on 1st April, 2012.

You are required to pass necessary Journal entries and prepare the Balance Sheet on 01.04.2012. (12 Marks) (Nov. 2012)
Answer:
Journal Entries

Balance Sheet as on 1st April, 2012

Notes to Accounts

Assumption:
The buy-back of shares has been done out of the proceeds of issue of preference shares, therefore, no amount is transferred to capital redemption reserve for buy-back.

Question 7.
Gurudev Limited purchases for immediate cancellation 6,000 of its own 12% debentures of ₹ 100 each on 1st November, 2017. The dates of interest being 31st March, and 30th September. Pass necessary journal entries relating to the cancellation if: (4 Marks) (May 2018)
(i) Debentures are purchased at ₹ 98 ex-interest.
(ii) Debentures are purchased at ₹ 98 cum-interest.
Answer:
Journal Entries
(i) If Purchased Ex-interest

(ii) If Put chased Cum interest

Question 8.
Rama Limited issued 8% Debentures of ₹ 3,00,000 in earlier year on which interest is payable half yearly on 31st March and 30th September. The company has power to purchase its own debentures in the open market for cancellation thereof. The following purchases were made during the financial year 2009-10 and cancellation made on 31st March, 2010:
(a) On 1st April, ₹ 50,000 nominal value debentures purchased for ₹ 49,450, ex-interest.
(b) On 1st September, ₹ 30,000 nominal value debentures purchased for ₹ 30,250 cum-interest.
Show the Journal Entries (without narrations) for the transactions held in the year 2009-10. (2 Marks) (Nov. 2010)
Answer:
Journal Entries

Question 9.
On 1 st April, 2010, A Ltd. had outstanding in its books 1,00,000 Debentures of f 100 each, interest @ 12% per annum. The interest on debentures was paid half-yearly on 30th September and 31st March of every year. On 31st May, 2010 the company purchased 30,000 Debentures of its own @ ₹ 98 (ex-interest) per debenture. The company cancelled the debentures so purchased on 31st March, 2011.

Pass the necessary Journal Entries to record the above transactions for the year ended 31st March, 2011. (5 Marks) (Nov. 2011)
Answer:
In the books of ‘A’ Limited
Journal Entries

Outside Investments Only

Question 10.
The following balances appeared in the books of Paradise Ltd on 1 -4-2011:
(i) 12% Debentures ₹ 7,50,000
(ii) Balance of Sinking Fund ₹ 6,00,000
(iii) Sinking Fund Investment ₹ 6,00,000 represented by 10% ₹ 6,50,000 secured bonds of Government of India.

Annual contribution to the Sinking Fund was ₹ 1,20,000 made on 31st March each year. On 31-3-2012, balance at bank was ₹ 3,00,000 before receipt of interest. The company sold the investment at 90%, for redemption of debentures at a premium of 10% on the above date.
You are required to prepare the following accounts for the year ended 31st March, 2012: (8 Marks) (May 12)
(1) Debentures Account
(2) Sinking Fund Account*
(3) Sinking Fund Investment Account**
(4) Bank Account
(5) Debenture Holders Account
Answer:
12% Debentures A/c

Sinking Fund A/c

Sinking Fund Investment A/c (10% Secured Bonds of Govt.)

Bank A/c

‘The Oues, is based on cumulative concept. Had it been solved as per non-cumulative concept if would have been transfer to Profit & Loss A/c.

Debenture holders A/c

Question 11.
The following balances appeared in the books of Heaven Ltd. on 1st April, 2016:

1. 12% Debentures ₹ 9,50,000;
2. Balance of Sinking Fund ₹ 8,00,000
3. Sinking Fund Investment ₹ 8,00,000 represented by 10% ₹ 8,50,000 Secured Bonds of Government of India.

Annual contribution to the Sinking Fund was ₹ 1,50,000 made on 31st March every year. On 31st March, 2017, balance at bank was ₹ 4,00,000 before receipt of interest. The company sold the 90% face value of its investments, for redemption of debentures, at a premium of 10% on the above date.

You are required to prepare the following accounts for the year ended on 31st March, 2017: (8 Marks) (Nov. 2017)
(a) Debentures Account;
(b) Sinking Fund Account;
(c) Sinking Fund Investment Account;
(d) Bank Account; and
(e) Debenture Holders Account.
Answer:
Debentures A/c

Sinking Fund A/c

Sinking Fund Investment A/c (10% Secured Bonds of Govt.)

Bank A/c

Debenture holders’ A/c

Question 12.
The following balances appeared in the books of a company as on December 31 st, 2017, 6% Mortgage 25,000 Debentures of ₹ 100 each. Debenture Redemption Reserve (for redemption of debentures) ₹ 26,05,000.
The following were the investments:
(i) ₹ 13,20,000, 4% Government Loan purchased at par (face value of ₹ 100 each)
(ii) ₹ 14,00,000, 31/2% Government paper purchased for ₹ 13,55,000 (face value of 100 each)
The interest on debentures had been paid up to December 31st, 2017.
On February 28th, 2018, the investments were sold at ₹ 87 and ₹ 90 respectively and the debentures were paid off at ₹ 101 together with accrued interest.
Write up the ledger accounts concerned.
Note: The Debenture Redemption Reserve is non-cumulative. (8 Marks) (May 2018)
Answer:
6% Debentures A/c

Premium on Redemption of Debentures A/c

Debentures Redemption Reserve Investment A/c


* Interest on investments on ₹ 13,20,000 (4% Govt. Loan) and ₹ 14,00,000 (3.5% Govt. Paper) not considered.

Debenture Interest A/c

Debenture Redemption Reserve A/c

Question 13.
ZED Ltd. had 25,000, 10% Debentures of ₹ 100 each outstanding as on 1st April, 2013, redeemable on 31st March, 2014. On 1st April, 2013, Sinking Fund was ₹ 24 lakhs represented by 3,000 own Debentures purchased at the average price of ₹ 98 and 8% Stocks of face value of ₹ 22 lakhs. The annual instalment towards Sinking Fund was ₹ 90,000.

On 31st March, 2014, the investments w ere realized at ₹ 97 and the Debentures were redeemed.
Draw the following Accounts for the year ended 31st March, 2014: (8 Marks) (May 2014)
(i) 10% Debenture Account,
(ii) Debenture Redemption Sinking Fund Account, *
(iii) Show the necessary working notes.
*Now called DRR A/c.
Answer:
10% Debentures A/c

Debenture Redemption Sinking Fund A/c

Working Notes:
1. Stock as on 1st April, 2013
Sinking Fund Balance as on 1st April, 2013 – ₹ 24,00,000
Less: Own Debentures – ₹ 2,94,000
8% Stock – ₹ 21,06,000

2. Sale Value of 8% Stock
Number of Stock = ₹ 22 lakhs/ ₹ 100 = 22,000
Sale Value = 22,000 × ₹ 97 = ₹ 21,34,000

3. Interest credited to Sinking Fund Account*

Own Debentures A/c

8% Stock Account

Note:
As the balance of Debenture Redemption Sinking Fund Account is more than the nominal value of debentures redeemed, the amount equal to the amount of debentures redeemed may be transferred to General Reserve Account Le. ₹ 25,00,000 and excess of fund Le. ₹ 2,30,000 may be transferred to P&L Account.

Question 14.
M/s. Piyush Ltd. had the following among their ledger opening balances on January 1, 2014;

As 31st December, 2014 was the date of redemption of the 2002 debentures, the company started buying own debentures and made the following purchases in the open market:
1-2-2014 – 5000 debentures at ₹ 98 cum-interest
1-6-2014 – 5000 debentures at ₹ 99 ex-interest.
Half yearly interest is due on the debentures on 30th June and 31st December in the case of both the companies.

On 31st December, 2014, the debentures in Sneha Ltd. were sold for ₹ 95 each ex-interest. On that date, the outstanding debentures of M/s. Piyush Ltd. were redeemed by payment and by cancellation.

Show the entries in the following ledger accounts of M/ s. Piyush Ltd. during 2014:
(i) Debenture Redemption Reserve Account,
(ii) Own Debenture Account.
The face value of a debenture was ₹ 100. (12 Marks) (May 2015)
Answer:
(i) Debenture Redemption Reserve A/c

(ii) Own Debentures A/c

Working Note:
13.5% Debentures A/c in Sneha Ltd.

11% Debentures A/c

Cost of debentures purchased on 1.2.2014

Question 15.
A company had 40,000; 10 debentures of 100 each outstanding on 1 April, 2015 redeemable on 31st March, 2016.

On that day, sinking fund was ₹ 37,45,000 represented by 5,000 own debentures purchased at average price of f 99 and 9% stocks of the face value of ₹ 33,00,000. The annual instalment was ₹ 1,42,000. On 31 st March, 2016, the investments were realized at ₹ 98 and the debentures were redeemed.
Draw the following accounts for the year ending 31st March, 2016:
(i) 10% Debentures Account.
(ii) Debenture Redemption Sinking Fund Account (10 Marks) (Nov. 2016)
Answer:
10% Debentures A/c

Debenture Redemption Sinking Fund A/c

Working Notes:
1. Amount of stock as on 1st April, 2015

2. Sales value of 9% stock
= Face vaIue/ per stock
= ₹ 33,00,000/ ₹ 1oo = 33,000 stock
Sales value = 33,000 stock × ₹ 98 per stock
= ₹ 32,34,000

3. Interest credited to Sinking Fund

Own Debentures A/c

9% Stock A/c

Question 16.
A Company had issued 1,000 12% debentures of ₹ 100 each redeemable at the company’s option at the end of 10 years at par or prior to that by purchase in open market or at ₹ 102 after giving 6 months’ notice. On 31st December, 2016, the accounts of the company showed the following balances:

Debenture redemption fund ₹ 53,500 represented by 10% Govt. Loan of a nominal value of ₹ 42,800 purchased at an average price of ₹ 101 and ₹ 10,272 uninvested cash in hand.

On 1st January 2017, the company purchased ? 11,000 of its own debentures at a cost of ₹ 10,272.

On 30th June, 2017, the company gave a six months’ notice to the holders of ₹ 40,000 debentures and on 31st December, 2017 carried out the redemption by sale of ₹ 40,800 worth of Govt. Loan at par and also cancelled the own debentures held by it.

Prepare ledger account of Debenture Redemption Fund Account and Debenture Redemption Fund Investment Account for the year ended 31.12.2017, assuming that, interest on company debentures & Govt, loan was payable on 31st December every year. (8 Marks) (November 2018)
Answer:
Debenture Redemption Fund A/c

Debenture Redemption Fund Investment A/c

Question 17.
A Company had issued 20,000, 13% Convertible debentures of ₹ 100 each on 1st April, 2007. The debentures are due for redemption on 1st July, 2009. The terms of issue of debentures provided that they were redeemable at a premium of 5% and also conferred option to the debenture holders to convert 20% of their holding into equity shares (Nominal value ? 10) at a price of ₹ 15 per share. Debenture holders holding 2,500 debentures did not exercise the option. Calculate the number of equity shares to be allotted to the Debenture holders exercising the option to the maximum. (2 Marks) (May 2010)
Answer:
Computation of number of equity shares to be allotted

Redemption value of 3,500 debentures at a premium of 5% ₹ 3,67,500
[3,500 × ( 100 + 5)]
Equity shares of ₹ 10 each issued on conversion [₹ 3,67,500/₹ 15] = 24,500 shares

Question 18.
XYZ Ltd. had issued 30,000, 15% convertible debentures of ₹ 100 each on 1st April, 2008. The debentures are due for redemption on 1st March, 2011. The terms of issue of debentures provided that they were redeemable at a premium of 5% and also conferred option to the debenture holders to convert 20% of their holding into equity shares (Nominal Value ₹ 10) at a price of ₹ 15 per share. Debenture holders holding 2500 debentures did not exercise the option. Calculate the number of equity shares to be allotted to the Debenture holders exercising the option to the maximum. (4 Marks) (May 2011)
Answer:
Computation of number of equity shares allotted to be debenture holders

Question 19.
A company had issued 30,000,14% convertible debentures of ₹ 100 each on 1st April, 2014. The debentures are due for redemption on 1st July, 2016. The terms of issue of debentures provided that they were redeemable at a premium of 5% and also conferred option to the debenture holders to convert 20% of their holding into equity shares (Nominal value ₹ 10) at a price of ₹ 15 per share. Debenture holders holding 2,500 debentures did not exercise the option. Calculate the number of equity shares to be allotted to the debenture holders exercising the option to the maximum. (4 Marks) (May 2017)
Answer:
Computation of number of equity shares to be allotted

Redemption value of 5,500 debentures at a premium of 5% [5,500 × (100 + 5)] – ₹ 5,77,500
Equity shares of ₹ 10 each issued on conversion [₹ 5,77,500/₹ 15] – 38,500 shares

Redemption By Conversion And Cash

Question 20.
The summarised Balance Sheet of A Limited, as on 30th June, 2014, stood as follows:

The debentures are due for redemption on 30th June, 2014. The terms of issue of debentures provided that they were redeemable at a 10% premium and also conferred option to the debenture holders to convert 25% of their holding into equity shares at a predetermined price of ₹ 27.50 per share and the balance payment in cash.

Assuming that:

1. except for 80 debenture holders holding totally 50,000 debentures, the rest of them exercised the option for maximum conversion.
2. the investments realise ₹ 70 lakhs on sale; and
3.  all the transactions are put through, without any lag, on 30th June, 2014.

Redraft the balance sheet of the company as on 30th June, 2014 after giving effect to the redemption. Show your calculations in respect of the number of equity shares to be allotted and the cash payment necessary. (RTP)
Answer:
Balance Sheet as on June 30, 2014

Notes to Accounts

Working Notes:
(i) Calculation of number of shares to be allotted:

Redemption value of 25,000 debentures @ 110 ₹ 27,50,000
Number of Equity Shares to be allotted:
= \(\frac{27,50,000}{27.50}\) = 1,00,000 shares of ₹ 10 each.

(ii) Calculation of cash to be paid:

(iii) Cash and Bank Balance:

Question 21.
M Ltd. have authorized capital of 8,00,000 equity shares of ₹ 10 each. But out of these 2,40,000 shares have been issued as fully paid.

The company has an outstanding 14% Debentures loan of ₹ 24,00,000 redeemable at 102 per cent and interest has been paid up to date on December 31, 2016. On that date, the balance of the Debenture Redemption Reserve Account is ₹ 20,00,000 and corresponding Investment Account ₹ 29,00,000 (at cost) of which the market value is ₹ 18,00,000.

The directors resolved to redeem the Debentures on January 1, 2017 and the holders are given an option to receive payment either wholly in cash or wholly in fully paid equity shares @ 8 shares for every ₹ 100 of debentures.

75% of the holders decided to exercise the option for taking shares in repayment and cash for the rest is procured by realizing an adequate amount of investment at the prevailing market value.

Draw up journal entries (including Cash Book Entries) to give effect to the above transactions. (RTP)
Answer:
Journal Entries

Working Notes:
(1) For every ₹ 100 debenture, amount payable on redemption including premium is ₹ 102
Less: Face value of 8 shares of ₹ 10 each to be issued for redemption of each debenture (8 × ₹ 10) – ₹ 80
Premium on issue of 8 shares – ₹ 22
Therefore, premium on issue of each share ₹(\(\frac{22}{8}\)) – ₹ 2.75

(2) Shares to be issued for conversion of 75% Debentures into × shares @ 8 shares for every ₹ 100 Debenture i.e. ₹ 24,00,000
\(\frac{75}{100}\) × \(\frac{8}{100}\) = 1,44,000 shares

(3) Cash payment for remaining 25% debenture holders who exercised the option of cash i.e., ₹ 24,00,000 \(\frac{25}{100}\) × \(\frac{102}{100}\)
= ₹ 6,12,000

(4) Face value of investment to be sold to realize ₹ 6,12,000 will be ₹ 6,80,000 [ i.e. ₹ \(\frac{20,00,000}{18,00,000}\) × ₹ 6,12,000)
Loss on sale of investment = 6,80,000 – 6,12,000 = 68,000

(5) Debenture Redemption Reserve transferred to General Reserve:
20,00,000 – 48,000 – 68,000 = ₹ 18,84,000

Question 22.
The summarized Balance Sheet of S Ltd. as on 31st March, 2018 read as under:

The debentures are due for redemption on 1st April, 2018. The terms of issue of debentures provided that they were redeemable at a premium 10% and also conferred option to the debenture holders to convert 40% of their holding into equity shares at a predetermined price of ₹ 11 per share and the balance payment in cash.

Assuming that:

1. Except for debenture holders holding 200 debentures in aggregate, rest of them exercised the option for maximum conversion,
2. The investments realized ₹ 56,000 on sale,
3. All the transactions were taken place on 1st April, 2018,
4. Premium on redemption of debentures is to be adjusted against General Reserve. You are required to
   (a) Redraft the Balance Sheet of S Ltd. as on 01.04.2018 after giving effect to the redemption.
   (b) Show your calculations in respect of the number of equity shares to be allotted and the cash payment necessary. (RTP)

Answer:
Balance Sheet as on 01.04.2018

Notes to Accounts

Working Notes:
(i) Calculation of number of shares to be allotted

(ii) Calculation of cash to be paid

(iii) Cash and Bank Balance

Question 23.
The summarized Balance Sheet of Entyce Ltd. as on 31st March, 2013 read as under:

The debentures are due for redemption on 1st April, 2013. The terms of issue of debentures provided that they were redeemable at a premium 5% and also conferred option to the debenture holders to convert 25% of their holding into equity shares at a pre-determined price of ₹ 11.90 per share and the balance payment in cash.
Assuming that:

1. Except for debenture holders holding 12,000 debentures in aggregate, rest of them exercised the option for maximum conversion,
2. The investments realized 32,00,000 on sale,
3. All the transactions were taken place on 1st April, 2013 without any lag, and
4. Premium on redemption of debentures is to be adjusted against General Reserve.

Redraft the Balance Sheet of Entyce Ltd. as on 01.04.2013 after giving effect to the redemption. Show your calculations in respect of the number of equity shares to be allotted and the cash payment necessary. (8 Marks) (Nov. 2013)
Answer:
Balance Sheet as on 01.04.2013

Notes to Accounts

Working Notes:
(i) Calculation of number of shares to be allotted

Number of Equity Shares to be allotted:
\(\frac{17,85,000}{11.90}\)
= 1,50,000 shares of ₹ 10 each.

(ii) Calculation of cash to be paid

(iii) Cash and Bank Balance

Open Market Purchase – Own Debentures And Outside Investments

Question 24.
M Limited recently made a public issue of debentures. The following information is available in respect of the issue:

1. 3,00,000 partly convertible debentures of face value and issue price of ₹ 100 per debenture were issued;
2. Conversion of 50% of each debenture is to be done on expiry of 6 months from date of close of issue;
3. Date of closure of subscription list is 1st June, 2012. Date of allotment is 1st July, 2012;
4. Interest on debenture at the rate of 12% is payable from date of allotment;
5. Equity share of ₹ 10 each are issued at ₹ 50 per share for the purpose of conversion;
6. Underwriting commission is 2%;
7. 2,25,000 debentures were applied for;
8. Interest on debentures is payable half yearly on 30th September and 31st March.

Give Journal entries for all transactions relating to the above, including cash and bank entries for the year ended 31st March, 2013. (8 Marks) (Nov. 2013)
Answer:
Journal Entries

Working Note:
Calculation of Debenture Interest for the half year ended 31st March, 2013

Question 25.
Venus Limited recently made a public issue in respect of which the following information is available:

1. No. of partly convertible debentures issued 4,00,000; face value and issue price of ₹ 100 per debenture.
2. Convertible portion per debenture – 80%, date of conversion – on expiry of 7 months from the date of closing of issue.
3. Date of closure of subscription list – 01.06.2013, date of allotment – 01.07.2013, Rate of interest on debentures – 10% p.a. payable from the date of allotment. Value of equity share for the purpose of conversion – ₹ 40 (Face value ₹ 10)
4. Underwriting commission – 3%
5. No. of debentures applied for 3,00,000
6. Interest payable on debentures – half yearly on 30th September and 31st March.

Write relevant journal entries for all transactions arising out of the above during the year ended on 31st March, 2014 (including cash and bank entries). (8 Marks) (Nov. 2014)
Answer:
Journal Entries

Working note:
Computation of debenture interest (for the half year ended 31st March, 2014)