Cs Executive JUN2010

EXECUTIVE PROGRAMME
JUNE 2010
GENERAL AND COMMERCIAL LAWS

Time allowed: 3 hours Max. Marks: 100
PART A
NOTE : Answer SIX questions including Question No.1 which is Compulsory.
Question 1
(a) “Constitution of India is basically federal with strong unitary features.”
Discuss. (8 marks)
(b) Explain the writ jurisdictions of the Supreme Court and High Courts as
provided in the Constitution of India. (6 marks)
(c) Explain the mischief rule in the interpretation of statutes. (6 marks)
Answer 1(a)
The Constitution of India is basically federal in character with many striking
unitary features. The Constitution of India possesses all the essential features of a
federal system. A federal system has the following essential features:
(i) Dual Government
(ii) Distribution of powers between the Union Government and the State
Governments.
(iii) Supremacy of the Constitution.
(iv) A written and rigid Constitution.
(v) Authority of the Courts.
The Constitution of India possesses all the above-mentioned features of a federal
Government. At the same time, the following features of the Constitution are
indicative of its unitary character:
(i) President of India is the Constitutional Head of the executive of the Union
and the appointment of Governors is made by him. They are answerable to
the President and hold office till they enjoy pleasure of the President;
(ii) Appointment and transfers of the Chief Justice and the Judges of the High
Court by the President;
(iii) Parliament’s powers to form States and alteration of boundaries etc. of the
existing states;
(iv) Supremacy of Parliament in legislative matters;
(v) Parliament’s powers to legislate on subjects of State list under special
circumstances;
(vi) Control of Centre over State legislatures;
EP-GCL-June 2010 2
(vii) Power of Centre to give directions to the States.

(viii) All key administrative positions in the states are filled by officers of All India
Services of the Union e.g. IAS, IPS.
(ix) Dependence of States upon the Centre for grants-in-aid since their financial
resources are inadequate.
(x) Suspension of federal structure during the emergency period as declared
under the Constitution.
All the facts as stated above, support the contention as correctly observed by Sir
Ivor Jennings that Indian Constitution establishes a federation, which possesses
strong centralizing tendency.
Answer 1(b)
The Supreme Court and the High Courts are empowered to exercise writ
jurisdiction under Articles 32 and 226 of the Constitution respectively. For
enforcement of Fundamental Rights as conferred on the citizens of India and others
under the Constitution of India. Article 32 of the Constitution confers on the Supreme
Court of India power to issue directions or orders or writs including writs in the nature
of habeas corpus, mandamus, prohibition, quo warranto and certiorari, whichever
may be appropriate, for the enforcement of any of the said rights.
The Constitution also confers power on the High Courts to issue certain writs.
Article 226 of the Constitution lays down: “Notwithstanding anything in Article 32,
every High Court shall have power, throughout the territories in relation to which it
exercises jurisdiction, to issue to any person or authority, including in appropriate
cases, any Government, within those territories, directions, orders or writs, including
writs in the nature of habeas corpus, mandamus, prohibition, quo warranto and
certiorari, or any of them, for the enforcement of any of the rights conferred by Part III
(Fundamental Rights) and for any other purpose.
The difference between writ jurisdictions of both the Courts may be summarized
as follows:
(1) The Supreme Court can exercise writ jurisdiction under Article 32 only for the
enforcement of fundamental rights; whereas the High Court exercises this
jurisdiction under Article 226 for the enforcement of fundamental rights and
for other purposes also. This power is exercisable by each High Court
throughout the territory in relation to which it exercises jurisdiction.
(2) Article 32 itself being a fundamental right, the Constitutional remedy of writ is
available to anyone whose fundamental rights are infringed by the State
action.
(3) While the Supreme Court can issue a writ against any person or
Government within the territory of India, a High Court can, under Article 226,
issue a writ against any person, Government or other authority only if such
person or authority is physically resident or located within the territorial
jurisdiction of that particular High Court or if the cause of action arises within
such jurisdiction.
3 EP-GCL-June 2010
(4) The jurisdiction of the High Court also extends to the enforcement of rights
other than fundamental rights provided there is a public duty. The Supreme
Courts jurisdiction to issue writs extends to all fundamental rights (Common
Cause v Union of India, A.I.R. 1999 SC 2979).
Answer 1(c)
The Mischief Rule
In 1584, in Heydon’s Case, it was resolved by the Barons of the Exchequer “that
for the sure and true interpretation of all statutes in general (be they penal or
beneficial, restrictive or enlarging of the Common Law) four things are to be
discerned and considered: (1) What was the Common Law before the making of the
Act; (2) What was the mischief and defect for which the Common Law did not
provide; (3) What remedy the parliament had resolved and appointed to cure the
disease of the Commonwealth; and (4) The true reason of the remedy.
The rule laid down in Heydon’s case which has “now attained the status of a
classic provides that the Courts must adopt that construction which “shall suppress
the mischief and advance the remedy”. But this does not mean that a construction
should be adopted which ignores the plain natural meaning of the words or disregard
the context and the collection in which they occur. (Umed Singh v. Raj Singh, AIR
1975 SC 43)
In Sodra Devi’s Case (AIR 1957 SC 832), the Supreme Court observed that the
rule in Heydon’s case is applicable only when the words in question are ambiguous
and are reasonably capable of more than one meaning.
Question 2
Attempt any four of the following:
(i) State the circumstances in which a property may be transferred in favour of
an unborn person.
(ii) Explain the rule of lis pendens as provided in the Transfer of Property Act,
1882.
(iii) What are ‘cyber offences’ under the Information Technology Act, 2000 ?
(iv) State the documents which are required to be compulsorily registered under
the Registration Act, 1908.
(v) Explain the consequences of the instruments which are not duly stamped
under the Indian Stamp Act, 1899. (4 marks each)
Answer 2(i)
Section 13 of the Transfer of Property Act, 1882 permits transfer of property in
favour of a unborn person.
As per Section 13 of the Transfer of Property Act where on a transfer of property,
an interest therein is created for the benefit of a person not in existence at the date of
transfer, subject to a prior interest created by the same transfer, the interest created
for the benefit of such person shall not take effect unless it extends to the whole of
EP-GCL-June 2010 4
the remaining interest of the transferor in the property. Thus if a property is given to
an unborn person, two conditions should be satisfied:
(i) it should be preceded by a life estate in favour of a living person, and
(ii) it should comprise the whole of the remaining interest of the transferor so that
there can be no further interest in favour of others.
The sum and substance of Section 13 is that property can be transferred to an
unborn person provided the transfer is supported by a prior life estate and the unborn
person is given an absolute estate.
Answer 2(ii)
Doctrine of Lis pendens
Section 52 of the Transfer of Property Act, 1882 embodies the doctrine of lis
pendens, as expressed in the maxim “ut lite pendente nihil innovetur” which means
that nothing new should be introduced in a pending litigation. Section 52 states that
during the pendency of a suit in a court of law, property which is subject to litigation
cannot be transferred. It means that the property may be transferred but this transfer
is subject to the rights that are created by a Court’s decree.
Essentials:
(i) There must be a suit or proceeding in a court of competent jurisdiction;
(ii) The suit or proceeding must be one in which right to immovable property is
directly and specifically in question.
(iii) The suit or proceeding must not be collusive.
(iv) There must be transfer of or otherwise dealing with the property in dispute by
any party to the litigation.
(v) Such transfer must affect the rights of the other party that may ultimately
accrue under the terms of the decree or order.
A suit in foreign Court cannot operate as lis pendens. The doctrine of lis
pendens does not apply to movables.
Answer 2(iii)
Cyber offences
Chapter 11 of the Information Technology Act, 2000 (Sections 65-78) prescribes
the offences relating to computers etc. and connected matters. The offences listed in
this Chapter are the following–
(a) Tampering with computer source documents;
(b) “Hacking” with computer systems;
(c) Publishing of obscene information in electronic form;
(d) Securing access to any computer, computer system or computer network
declared by the appropriate Government to be a “protected system”;
5 EP-GCL-June 2010
(e) Misrepresentation about a material fact to, or suppression of a material fact

from, the Controller or the Certifying Authority;
(f) Breach of confidentiality and privacy, by a person who has, in the exercise of
a power conferred by the Act, secured access to electronic record, book,
register etc.;
(g) Publishing a digital signature certificate, which is false in certain particulars;
(h) Knowing, creating, publishing etc. a Digital Signature Certificate, for any
fraudulent or unlawful purpose.
Answer 2(iv)
Documents whose registration is compulsory
According to Section 17 of the Registration Act, 1908, documents whose
registration is compulsory are the following:
(a) Instruments of gift of immovable property
In a case where the donor dies before registration, the document may be
presented for registration after his death and if registered it will have the
same effect as registration in his life time. On registration the deed of gift
operates as from the date of execution.
(b) Other non-testamentary instruments (other than instruments of gift of
immovable property) which purport or operate to create, declare, assign, limit
or extinguish, whether in present or in future, any right, title of interest
whether vested or contingent, of the value of one hundred rupees and
upwards, to or in immovable property situated in a district in which this Act is
in force.
Whether an instrument requires registration under Section 17(1)(b) depends
upon whether it operates or purports to bring about a change in legal relation
in respect of some property.
(c) Non-testamentary instruments which acknowledge the receipt or payment of
any consideration on account of the creation, declaration, assignment,
limitation, or extinction of any such right, title or interest.
This clause requires an acknowledgement in the form of a receipt to be
registered, but not an acknowledgement of the fact that a transaction has
taken place. To be registrable under this clause a receipt must satisfy the
following two conditions:
(i) it must be the receipt of a consideration; and
(ii) it must on the face of it be an acknowledgement of payment or some
consideration on account of the creation, declaration, assignment,
limitation or extinction of an interest of the value of Rs. 100 or upwards in
immovable property.
Answer 2(v)
Consequences of the instruments not duly stamped
Chapter IV of the Indian Stamp Act, 1899 (consisting of Sections 35 to 48)
provides for the consequences that follow where instruments are not duly stamped.
EP-GCL-June 2010 6
Section 33 contains a mandate on certain officials to impound an instrument

which is not duly stamped. Section 33(1) provides that every person having by law or
consent of parties, authority to receive evidence and every person in charge of a
public office, except an officer of police before whom any instrument, chargeable in
his opinion, with duty is produced or comes in the performance of his functions, shall,
if it appears to him that the instrument is not duly stamped, impound the same.
Section 35 of the Indian Stamp Act, 1899 stipulates that no instrument
chargeable with duty shall be–
(i) admitted in evidence for any purpose whatsoever by any person authorised
by law (such as judges or commissioners) or by the consent of the parties
(such as arbitrators) to record evidence; or
(ii) shall be acted upon;or
(iii) registered; or
(iv) authenticated by any such person as aforesaid or by any public officer unless
such instrument is duly stamped.
An insufficiently stamped instrument is not an invalid document and it can be
admitted in evidence on payment of penalty.
The proviso appended to Section 35 envisages certain circumstances where-
under an instrument shall be admissible in evidence.
Question 3
Distinguish between any four of the following:
(i) ‘Summons cases’ and ‘warrant cases’.
(ii) ‘Bailable offences’ and ‘non-bailable offences’.
(iii) ‘Battery’ and ‘assault’.
(iv) ‘Condition precedent’ and ‘condition subsequent’.
(v) ‘Primary evidence’ and ‘secondary evidence’. (4 marks each)
Answer 3(i)
Summons cases and warrant cases
"Summons case" as defined under the provisions of Criminal Procedure Code
means a case relating to an offence and not being a warrant case. [Section 2(w)]
A "Warrant case" means a case relating to an offence punishable with death,
imprisonment for life or imprisonment for a term exceeding two years. [Section 2(x)]
Actually summons case relate to the offences for which punishment is the
imprisonment for a term not exceeding two years i.e., petty nature of offences.
Warrant case relates to serious offence and serious punishment. Thus, a case
assumes the character of a ‘summons case’ or a ‘warrant case’ according to the
nature and measure of punishment which the law attaches to the offence. However,
the difference is only for the purpose of a procedure for trial.
7 EP-GCL-June 2010
Answer 3(ii)
Bailable Offence and Non-bailable Offence
As per Section 2(a) of the Criminal Procedure Code a "bailable offence" means
an offence which is shown as bailable in the First Schedule or which is made bailable
by any other law for the time being in force.
"Non-bailable" offence means any other offence.
Answer 3(iii)
Battery and Assault
Any direct application of force to the person of another individual without his
consent or lawful justification is a wrong of battery. To constitute a tort of battery,
therefore, two things are necessary: (i) use of force, however, trivial it may be without
the plaintiff’s consent, and (ii) without any lawful justification.
Even though the force used is very trivial and does not cause any harm, the
wrong is committed. Thus, even to touch a person in anger or without any lawful
justification is battery.
Assault is any act of the defendant which directly causes the plaintiff immediately
to apprehend a contact with his person. Thus, when the defendant by his act creates
an apprehension in the mind of the plaintiff that he is going to commit battery against
him, the tort of assault is committed. The law of assault is substantially the same as
that of battery except that apprehension of contact, not the contact itself has to be
established.
Answer 3(iv)
Condition precedent and condition subsequent
When an interest is created on the transfer of property but is made to depend on
the fulfillment of a condition by the transferee, the transfer is known as a conditional
transfer. Such a transfer may be subject to a condition precedent or a condition
subsequent. If the interest is made to accrue on the fulfillment of a condition, the
condition is said to be condition precedent.
A transfer may also be made subject to a contingency which may or may not
occur. Thus, an interest may be created with the condition superadded that it shall
cease to exist in case a specified uncertain event shall happen, or in case a specified
uncertain event shall not happen. This is known as condition subsequent. Condition
subsequent is one which destroys or divests the rights upon the happening or non-
happening of an event.
Answer 3(v)
Primary and Secondary Evidence
As per the Indian Evidence Act, "Primary evidence" means the document itself
produced for the inspection of the Court (Section 62). Where a document is executed
in several parts, each part is primary evidence of the document. Where a number of
EP-GCL-June 2010 8
documents are all made by one uniform process, as in the case of printing
photography, or photography, each is primary evidence of the contents of the rest. If
a document is executed in counterpart, each counterpart being executed by one or
some of the parties only, each counterpart is primary evidence as against the parties
executing it.
“Secondary evidence” is generally in the form of compared copies, certified
copies or copies made by such mechanical processes which in themselves ensure
accuracy of the copy. Section 63 of the Indian Evidence Act defines the kinds of
secondary evidence permitted by the Act. According to Section 63, "secondary
evidence" means and includes.
(1) certified copies given under the provisions hereafter contained;
(2) copies made from the original by mechanical processes which in themselves
ensure the accuracy of the copy, and copies compared with such copies;
(3) copies made from or compared with the original;
(4) counterparts of documents as against the parties who did not execute them;
(5) oral accounts of the contents of a document given by some person who has
himself seen it.
Question 4
Write notes on any four of the following:
(i) E-governance
(ii) Setting aside of an award
(iii) Perpetual injunction
(iv) Rectification of an instrument
(v) Specific performance of a contract. (4 marks each)
Answer 4(i)
E-governance
The information Technology Act, 2000 grants legal recognition to electronic
records by laying down that where (by any law) “information” or any other matter is to
be in:
(a) writing or
(b) typewritten form or
(c) printed form,
then, such requirement is satisfied, if such information or matter is:
(i) rendered or made available in an electronic form; and
(ii) accessible, so as to be usable for a subsequent reference. (Section 4)
The term “information”, as defined in Section 2(1) (v) of the Act, includes data,
text, images, sound, voice, codes, computer programmes, software and data-bases
or micro-film or computer-generated “micro-fiche”.
9 EP-GCL-June 2010
Private transactions: Section 4 of the Information Technology Act, practically

equates electronic record with a manual or typed or printed record. The next Section
proceeds to achieve the same object with regard to signature. Where any law
provides that information or any other matter shall be “signed”, such requirement is
satisfied by authentication through digital signature in the prescribed manner.
(Section 5)
Public records: The Act brings in the regime of electronic records and digital
signature the public records, by making an analogous provision which grants
recognition to electronic records and digital signatures, in cases where any law
provides for
(a) the filing of any form, application or any other document with a Governmental
office or agency or
(b) the grant of any licence, permit etc. or
(c) the receipt or payment of money in a particular manner. (Section 6)
Answer 4(ii)
Setting aside of an Award
Under Section 34 of the Arbitration and Conciliation Act, 1996 the parties can
approach the Court for setting aside the Award. The grounds for setting aside an
arbitral award have been spelled out in Section 34(2) of the Act. Section 34(2) of
Arbitration and Conciliation Act, 1996 envisages the following grounds on which an
arbitral award may be set aside.
(i) Incapacity of a party;
(ii) Invalidity of the arbitration agreement;
(iii) Arbitral tribunal not properly constituted;
(iv) Party applying not given proper notice of the appointment of the arbitrator or
of the arbitral proceedings;
(v) Award not in accordance with the terms of submission to arbitration in regard
to dispute;
(vi) Arbitral tribunal not properly constituted or the arbitral procedure not in
accordance with the agreement of the parties or with the Act;
(vii) The subject matter of the dispute not capable of settlement by arbitration
under the law;
(viii) Award being in conflict with the public policy of India.
Section 34(3) of the Act prescribes a time limit of three months for making an
application for setting aside the arbitral award. The prescribed period of three
months could be extended to a maximum period of 30 days by the Court if it is
satisfied that the applicant was prevented by sufficient cause from making the
application within the said period.
Answer 4(iii)
Perpetual injunction
Specific Relief Act, 1963 grants specific relief called Preventive Relief i.e.,
preventing a party from doing that which he is under an obligation not to do.
EP-GCL-June 2010 10
Preventive relief is granted at the discretion of the court by way of an injunction. The
injunction may be temporary or perpetual.
The temporary injunctions are granted under Order 39 Rules 1-2 of the Civil
Procedure Code while perpetual injunctions are dealt within Section 38 of the Specific
Relief Act.
Section 38(1) dealing with granting of perpetual injunction states that subject to
the other provisions contained in or referred to by this chapter, a perpetual injunction
may be granted to the plaintiff to prevent the breach of an obligation existing in his
favour whether express or by implication.
Sub-section (2) states that a perpetual injunction can only be granted by the
decree made at the hearing and upon the merits of the suit; the defendant is thereby
perpetually enjoined from the assertion of right, or from the commission of an act,
which would be contrary to the rights of the Plaintiff.
The cases in which the perpetual injunction may be granted are of two classes.
The object is to prevent the breach of an obligation existing in favour of the applicant,
but such obligation may either arise out of a contract or otherwise. In case of
contractual agreement principles governing specific performance will apply and in
other cases, the injunction would be granted if the plaintiff can show that the
defendant has a legal duty or obligation towards him and that by the non-
performance of such duty the right to enjoyment of property has been materially
affected. Such cases are where the defendant is trustee of the property of the plaintiff
or where the injunction is necessary to prevent multiplicity of judicial proceedings, etc.
Answer 4(iv)
Rectification of an Instrument
Section 26 of the Specific Relief Act, 1963 deals with rectification of instruments.
Rectification means correction of an error in an instrument in order to give effect to
the real intention of the parties. Where a contract reduced into writing in pursuance
of previous agreement, fails to express real intention of the parties, the court will
rectify instrument in accordance with their true intention. Here, there must be an
existence as between the parties, a complete and perfectly unobjectionable contract;
but the writing designed to embody it, either from fraud or mutual mistake is incorrect
or imperfect and the relief sought is to rectify the writing so as to bring it into
conformity with the true intention. In such a case, if such instrument is enforced, one
party will suffer and if it is rescinded altogether both the parties will suffer but if it is
rectified and enforced neither party will suffer .The principle on which the Courts act
in correcting instruments is that parties are to be placed in the same position as they
would have stood if no error had been committed (Sudha Singh v. Munshi Ram, A.I.R
1927 Cal. 605). There must have been a complete agreement prior to the instrument.
It should be in writing and there must be clear evidence of mutual mistake or fraud.
Answer 4(v)
Specific Performance of a Contract
Specific performance is an equitable relief given by the court in case of breach of
a contract. It is the form of a judgement by the court ordering the defendant to
11 EP-GCL-June 2010
actually perform the contract according to its terms and stipulations. The stipulations
in the contract may be positive, i.e. to do a certain thing, or negative, i.e., not to do a
certain thing. The term specific performance is generally confined to the positive
stipulations, i.e., fulfillment of positive obligations.
Section 10 of the Specific Relief Act, 1963 provides the cases in which specific
performance of contract is enforceable. It says that except as otherwise provided in
this Chapter, the specific performance of any contract may, in the discretion of the
Court, be enforced (a) when there exists no standard for ascertaining the actual
damage caused by the non-performance of the act agreed to be done, or (b) when
the act agreed to be done is such that compensation in money for its non-
performance would not afford adequate relief. The explanation provides that unless
and until the contrary is proved, the Court shall presume:
(i) that the breach of a contract to transfer immovable property cannot be
adequately relieved by compensation in money, and (ii) that the breach of a contract
to transfer movable property can be so relieved except in the two cases: (a) where
the property is not an ordinary article of commerce or is of special value or interest to
the plaintiff, or consists of goods which are not easily obtainable in the market, and
(b) where the property is held by the defendant as the agent or trustee of the plaintiff.
So, under this Section, contracts for sale of patent right, copy right, shares of a
company which are not easily available, future property, chattels of special value,
etc., are specifically enforceable.
Question 5
(a) A document was executed outside India and it was presented for registration
after a lapse of four months from the date of its arrival in India. Whether the
document may be accepted for registration by the Registrar ? Decide. (6
marks)
(b) Choose the most appropriate answer from the given options in respect of the
following:
(i) Under the Transfer of Property Act, 1882, the transfer of property may be
made—
(a) Orally
(b) By written document
(c) By written document with its registration
(d) By delivery of property except where transfer is required to be in
writing under the law.
(ii) The right to foreclosure is available to the mortgagee when it is—
(a) English mortgage
(b) Simple mortgage
(c) Mortgage by conditional sale
(d) Usufructuary mortgage.
(iii) The income of transferred property may be accumulated for an unlimited
time where the property is transferred with condition—
(a) For the payment of debts taken by the transferor
EP-GCL-June 2010 12
(b) For the maintenance of the property itself

(c) For the maintenance of the descendants of the transferor generation
after generation
(d) All of the above.
(iv) under the Specific Relief Act, 1963, the relief of cancellation of a written
instrument is available—
(a) When an instrument is void or voidable at the option of the plaintiff
(b) Where the plaintiff may apprehend serious injury if the instrument is
left outstanding
(c) Where the instrument requires registration but is not registered
(d) Where conditions mentioned (a) and (b) above are fulfilled.
(v) The definition of the ‘State’ as given under Article 12 of the Constitution
of India includes—
(a) The Central Government and Parliament of India
(b) The Government and the Legislature of each State
(c) All local or other authorities within India and under the control of the
Government of India
(d) All of the above. (1 mark each)
(c) Re-write the following sentences after filling-in the blank spaces with
appropriate word(s)/figure(s):
(i) Perpetual injunction is granted under section___________ of the Specific
Relief Act, 1963.
(ii) A police officer may arrest an accused without warrant in case
of___________.
(iii) The Court of a Judicial Magistrate of the First Class is authorised to pass
a sentence of ___________.
(iv) The right to maintenance under section 125 of the Code of Criminal
Procedure, 1973 is available to ___________.
(v) The application of revision under the provisions of the Code of Civil
Procedure, 1908 is made to ___________. (1 mark each)
Answer 5(a)
The document may not be accepted for registration as it has been presented for
registration after the lapse of four months.
As per Section 26 of the Registration Act, 1908 if a document purporting to have
been executed by all or any of the parties out of India is presented for registration
within the prescribed time, the Registering Officer may, on payment of proper
registration fee, accept such document for registration if he is satisfied that:
(a) the instrument was executed out of India.
(b) the instrument has been presented for registration within four months after its
arrival in India.
13 EP-GCL-June 2010
Answer 5(b)
(i) (d) By delivery of property except where transfer is required to be in writing
under the law.
(ii) (c) Mortgage by conditional sale
(iii) (d) All the above
(iv) (d) Where conditions mentioned (a) and (b ) above are fulfilled
(v) (d) All the above
Answer 5(c)
(i) Section 38
(ii) Cognizable offence
(iii) Imprisonment up to 3 years or a fine of Rs.5000 or both
(iv) Wife, children legitimate or illegitimate unable to maintain themselves and
parents unable to maintain themselves
(v) The High Court
Question 6
State, with reasons in brief, whether the following statements are correct or
incorrect:
(i) The Constitution of India makes a few exceptions in which the Parliament is
authorised to make the laws even on the subjects included in the State List.
(ii) Article 174 of the Constitution of India empowers the Governor of the State to
dissolve the State legislature.
(iii) The Right to Information Act, 2005 confers on all citizens of India a right to
information.
(iv) Certain categories of information have been exempted from disclosure under
the Right to Information Act, 2005.
(v) Under certain circumstances, a person is liable for the torts committed by
another.
(vi) On the same cause of action, a fresh suit is barred by law.
(vii) Decree is a formal expression of an adjudication, whereas an order is the
decision of the court.
(viii) The procedure provided under any special or local law is not affected by the
procedure given under the Code of Civil Procedure, 1908.
(2 marks each)
Answer 6
(i) Correct: The Constitution of India makes a few exceptions in which
Parliament is authorized to make laws even on the subjects enumerated in
the State List.
(ii) Correct: Article 174 of the Constitution empowers the Governor of the State
to dissolve the State Assembly
EP-GCL-June 2010 14
(iii) Correct: The Right to Information Act, 2005 confers on all citizens the right to
information subject to provisions of the Act.
(iv) Correct: Certain categories of information have been exempted from
disclosure under the Act. These categories have been mentioned under
section 8 of the Act.
(v) Correct: In the case of vicarious liability, the person is liable for the tort
committed by another. For example, a master is vicariously liable for the tort
of his servant, principal for the tort of his agent and partners for the tort of a
partner
(vi) Correct: Section 10, 11 and 12 of CPC bars the fresh suit on the same
cause of action.
(vii) Correct: Decree is defined in Section 2(2) of the Code as (i) the formal
expression of an adjudication which, so far as regards the Court expressing
it; (ii) conclusively; (iii) determines the rights of the parties; (iv) with regard to
all or any of the matters in controversy; (v) in the suit and may be either
preliminary.
Order as set out in Section 2(14) of the Code means the formal expression of
any decision of a Civil Court which is not a decree.
(viii) Correct: Section 4 of the CPC provides that in the absence of any specific
provision to the contrary, nothing in this Code shall be deemed to limit or
otherwise affect any special or local law now in force or any special
jurisdiction or power conferred, or any special form of procedure prescribed,
by or under any other law for the time being in force.
Question 7
(a) Ashok sells a house to Vinay by a written document and delivers possession
to Vinay, but the document is not registered. After one year, Ashok sues
Vinay to take back the possession of the property on the ground that non-
registration of a document has no validity. Will Ashok succeed ? Which
doctrine of law can be invoked by Vinay in his defence? (6 marks)
(b) Kamal transfers his property worth Rs.10,000 to Shyam and by the same
instrument asked Shyam to transfer his property worth Rs.5,000 to Manoj.
Kamal dies before Shyam made his election. Can Manoj get compensation ?
If so, from whom and how much? (5 marks)
(c) Alok contracts to sell a piece of land to Vimal consisting of 100 bighas for
Rs.10 lakh and it turns out that only 50 bighas of land belongs to Alok. Who
can demand specific performance of contract and who cannot ? If there is a
demand of specific performance from rightful party, what will be the
consideration? (5 marks)
Answer 7(a)
Ashok will not succeed. Vinay will not be allowed to suffer simply because the
formality of registration has not been through. The legislature grants some relief to
such a transferee under section 53A of the Transfer of Property Act, 1882 which
embodies “the doctrine of part-performance”. This doctrine prohibits the transferor to
get back the possession from the transferee because legal requirements have not
been satisfied.
15 EP-GCL-June 2010
Answer 7(b)
This problem is based on doctrine of election stipulated under Section 35 of the
Transfer of Property Act, 1882.
Kamal dies before Shyam made his election as a result of which Manoy is at
loss as he won’t be receiving the property by this transfer. Here heirs of Kamal have
to compensate Manoy from the Kamal’s property to the extent of Rs. 5,000. Shyam’s
property worth Rs.5, 000 was intended by Kamal to be transferred to Manoy.
Answer 7(c )
50 bighas of land is a substantial part of the contract. Alok cannot demand specific
performance of contract but Vimal can demand specific performance of contract to get 50
bighas of land from Alok by paying the full consideration i.e. Rs. 10 lakhs.
Question 8
(a) Anil was a trustee of a trust. After Anil’s death, Brij wrongfully takes the
possession of the trust property. Chandan, the son of Anil files a suit for
recovery of possession of the property against Brij as the legal heir of Anil in
his individual capacity. But Chandan did not succeed. Then Chandan files
another suit for recovery of trust property against Brij in the capacity of
trustee as he was appointed as trustee after the death of Anil. Whether the
second suit is barred by the doctrine of constructive res judicata ? Explain.
(6 marks)
(b) Mohan filed a suit against Sohan and Rohan for partition of coparcenery
property ‘P-1’. The suit has been decided. Mohan files another suit against
Sohan and Rohan for the partition of coparcenery property ‘P-2’, which was
in existence at the time of filing of the first suit. Decide. (5 marks)
(c) Kamini informed Ajay in the year 2001 that she had committed theft of the
jewellery of her neighbour. Thereafter, Kamini and Ajay were married in
2002. In the year 2003, criminal proceeding were instituted against Kamini in
respect of the theft of jewellery. Ajay is called to give evidence in the case.
Decide whether Ajay can disclose the communication made to him by
Kamini. (5 marks)
Answer 8(a)
The present problem pertains to the doctrine of res judicata as provided under
section 11 of the CPC. The doctrine applies only when the parties of both the suits
are same and litigating under the same title.
In the problem, the first suit is filed by Chandan in his individual capacity i.e. as
legal heir of his deceased father to recover the possession of property. The second
suit is filed by him in his representative capacity i.e. as trustee of the trust property.
Therefore second suit is not barred by the doctrine of constructive res judicata.
Answer 8(b)
This problem pertains to O-2, Rule 2 of C.P.C. according to which in a suit filed
by the plaintiff, the whole claim or all the remedies available should be included in the
EP-GCL-June 2010 16
suit. If not included, for the rest, the second suit is barred. In this problem, the first
suit filed by Mohan should include all the coparcenery property i.e. P-1 and P-2.
Therefore, the second suit for P-2 cannot be filed because this property should be
included in the first suit.
Answer 8(c)
The present problem pertains to Section 122 of the Evidence Act which gives
privilege to the married couple for not disclosing any communication made during
marriage period.
In this problem Kamini gives the information regarding theft before marriage to
Ajay. Therefore, this communication does not come within the preview of the
privilege given under Section 122 of the Evidence Act. Therefore Ajay may disclose
the communication made to him by Kamini.
COMPANY ACCOUNTS, COST AND MANAGEMENT ACCOUNTING
Time allowed : 3 hours Maximum marks : 100
NOTE: All working notes should be shown distinctly.
PART—A
Question 1
(a) State, with reasons in brief, whether the following statements are correct or
incorrect :
(i) Accounting policies vary from enterprise to enterprise.
(ii) In the absence of declaration of dividend, there is no need to provide for
depreciation in the accounts of companies.
(iii) Securities premium money can be distributed as dividend.
(iv) For calculating minority interest, there is a need to distinguish between
capital and revenue profits of the subsidiary.
(v) While preparing the consolidated balance sheet, a contingent liability in
respect of a transaction between the holding and the subsidiary
companies is disappeared from the foot note.
(2 marks each)
following :
(i) Indian accounting standards are formulated under the authority of the —
(a) Council of the Institute of Chartered Accountants of India
(b) National Advisory Committee on Accounting Standards
(c) International Accounting Standard Board
(d) Accounting Standard Board.
(ii) As per section 79 of the Companies Act, 1956 from the date of receiving
the sanction of the Central Government, a company must issue shares at
discount within a period of —
(a) One month
(b) Two months
(c) Three months
(d) Six months.
(iii) As per section 387 of the Companies Act, 1956, total remuneration to
manager should not exceed the rate of net profit of the company except
with approval of the Central Government —
(a) 5%
(b) 2%
(c) 11%
(d) 10%.
17
EP-CACMA-June 2010 18
(iv) Profit on cancellation of own debentures should be transferred to —

(a) Profit and loss account
(b) Profit and loss appropriation account
(c) Capital reserve account
(d) Reserve capital account.
(v) Profit prior to incorporation is transferred to —
(a) General reserve
(b) Capital reserve
(c) Goodwill account
(d) Profit and loss account. (1 mark each)
appropriate word(s)/figure(s) :
(i) Goodwill is ____________ asset.
(ii) Preliminary expenses being of capital nature may be written-off against
___________.
(iii) Collateral security implies ___________ security given for a loan.
(iv) Interim dividend is a dividend declared at any time between the
________ where the final dividend is declared.
(v) Stock reserve for unrealised profit in respect of inter-company
transactions should be created by debiting __________ and crediting
__________ while preparing consolidated profit and loss account.
(1 mark each)
Answer 1(a)
(i) Correct: Accounting policies vary from enterprise to enterprise based on the
circumstances/practices of the industry. Accounting policies refer to the
specific accounting principles and the methods of applying those principles
adopted by the enterprise in the preparation and presentation of financial
statements. Variations may be in the following areas, such as – method of
depreciation, depletion; valuation of inventories; valuation of investments;
expenditure during construction, etc.
(ii) Incorrect: Depreciation represents wear and tear of assets due to constant
use. Unless depreciation is provided for, the accounts will not reflect a “true
and fair” view of the state of affairs of the company. Further, capital will not
be kept intact, unless the depreciation is charged. Hence, even if no dividend
is declared, depreciation is to be provided for in the accounts of companies.
(iii) Incorrect: Under Section 78 of the Companies Act, 1956, it is stated that
securities premium may be utilized in paying up unissued shares as bonus
shares, writing off preliminary expenses, writing off expenses or commission
or discount on issue of shares/debentures and providing for premium on
redemption of redeemable preference shares/debentures. The balance in
securities premium account will appear under the head Reserve and Surplus
19 EP-CACMA-June 2010
in the balance sheet. Securities premium money is not be used for

distribution as dividend.
(iv) Incorrect: Minority shareholders are concerned with their stake in the
holding company. Their rights consist in share capital and reserve and
surplus. In order to ascertain minority interests, capital profit and revenue
profit need not be distinguished.
(v) Correct: If the contingent liabilities relate to outsiders, it must be shown by
way a foot note in the consolidated balance sheet. But a contingent liability in
respect of a transaction between holding and subsidiary companies (internal
contingent liability) will disappear from the foot note as they appear as actual
liability in the consolidated balance sheet.
Answer 1(b)
(i) (a) - Council of the Institute of Chartered Accountants of India.
(ii) (b) - Two months
(iii) (a) - 5%
(iv) (c) - Capital reserve account
(v) (b) - Capital reserve
Answer 1(c)
(i) Goodwill is intangible asset.
(ii) Preliminary expenses being of capital nature may be written-off against
capital profit.
(iii) Collateral security implies additional security given for a loan.
(iv) Interim dividend is a dividend declared at any time between the two annual
general meetings where the final dividend is declared.
(v) Stock reserve for unrealised profit in respect of inter-company transactions
should be created by debiting Consolidated Profit and Loss Account and
crediting Stock Reserve Account [(or) debiting Revenue Profit and
crediting Stock Account] while preparing consolidated profit and loss
account.
Question 2
(a) Write short notes on any two of the following :
(i) Non-acceptability of International Accounting Standards
(ii) Capitalisation of profits and reserves
(iii) Phases of generation of intangible assets. (3 marks each)
(b) Following are balance sheets of H Ltd. and S Ltd. as at 31st March, 2009:
Liabilities H Ltd. S Ltd
(Rs.). (Rs.)
Share capital (Shares of Rs.100 each) 5,00,000 2,00,000
General reserve as on 1st April, 2008 1,00,000 60,000

Profit and loss account 1,40,000 90,000
Bills payable –– 40,000
Creditors 80,000 50,000
8,20,000 4,40,000
Assets
Goodwill 40,000 30,000
Other fixed assets 3,60,000 2,20,000
1,500 Shares in S Ltd. at cost 2,40,000 ––
Stock 1,00,000 90,000
Debtors 20,000 75,000
Cash at bank 60,000 25,000
8,20,000 4,40,000
The profit and loss account of S Ltd. showed a balance of Rs.50,000 on 1st
April, 2008. A dividend of 15% was paid on 15th October, 2008 for the year
2007-08. The dividend was credited by H Ltd. to its profit and loss account. H
Ltd. acquired shares on 1st October, 2008. The bills payable of S Ltd. were
all issued in favour of H Ltd. and the same were got discounted by H Ltd.
Included in the creditors of S Ltd. are Rs.20,000 for goods supplied by H Ltd.
The stock of S Ltd. includes goods to the value of Rs.8,000 which were
supplied by H Ltd. at a profit of 33.33% on cost. Prepare consolidated
balance sheet of H Ltd. and S Ltd. as on 31st March, 2009. (9 marks)
Answer 2(a)
(i) Non-acceptability of International Accounting Standards
Accounting practices in different countries vary due to divergent legislative
requirements, social and economic conditions, long standing practices, tax structure
and organized professional accounting. Often, multinational companies have a
different viewpoint than national companies. Worldwide conflicts of views have been
noticed in the national standards setting bodies and international bodies. There is a
glaring diversity in accounting practices in different countries which require
harmonization for evolving uniform accounting standards for world wide application.
Western countries have comparatively greater access to international standards
setting agencies. These factors are the primary reason for non acceptability of
international Accounting Standards throughout the world.
However, in the present era of globalization and liberalization, the world has
become a global village. A number of multinational companies have established their
business in emerging economies. This has resulted in adoption or convergence of
International Accounting Standards or International Financial Reporting Standards by
national standards setting bodies.
(ii) Capitalisation of profits and reserves
When a company accumulates huge reserves out of its profits which is much in
excess of the needs of the company, the excess amount can be distributed by way of
bonus shares among the existing shareholders of the company. Thus, the
accumulated profits and reserves of the company are converted into its share capital
which is permanently used in the business. This process is also known as
“capitalisation of profits and reserves”. Capitalisation of accumulated profits and
reserves of a company is possible only if the Articles of the company contain such
provision. The basic characteristics of bonus shares are the following:
(1) Bonus shares are issued to the existing shareholders.
(2) Bonus shares are always fully paid up.
(3) Right to renunciation is not available in respect of bonus shares.
Bonus shares can be issued out of the following:
(i) Balance in the Profit and Loss Account;
(ii) General Reserves or other Reserves created out of the profits;
(iii) Realised capital profits and reserves;
(iv) Securities Premium Account;
(v) Capital Redemption Reserve Account.
(iii) Phases of generation of intangible assets
Internally generated goodwill should not be recognized as an Intangible Asset.

An enterprise classifies the generation of Intangible assets into – (a) a research
phase; (b) a development phase.
Research Phase – No intangible asset arising from the research (or from the
research phase of an internal project) should be recognized. Expenditure on research
(or on the research phase of an internal project) should be recognized as an
expenses when it is incurred.
Development Phase – An intangible asset arising from development (or from the
development phase of an internal project) should be recognized if, and only if, an
enterprise can demonstrate all of the followings :
(a) The technical feasibility of completing the intangible assets so that it will be
available for use or sale.
(b) Its Intention to complete the intangible assets and use or sell it.
(c) Its ability to use or sell the intangible asset.
(d) How the intangible assets will generate probable future economic benefits.
(e) The availability of adequate technical, financial and other resources to
complete the development and to use or sell the intangible assets.
(f) Its ability to measure the expenditure attributable to the intangible assets
during its development reliably.
Answer 2(b)
Consolidated Balance Sheet of H Ltd. and S Ltd. as on March 31, 2009
Liabilities Rs. Rs. Assets Rs. Rs.
Share Capital: Fixed Assets:
5,000 Shares of Goodwill 70,000
Rs.100 each 5,00,000 Less: Capital
Minority Interest 87,500 Reserve 18,750 51,250
General Reserve 1,00,000
Profit & Loss A/c 1,40,000 Other Fixed
Add: Post Assets:
acquisition profit 26,250 H Ltd. 3,60,000
1,66,250 S Ltd. 2,20,000 5,80,000
Less: Pre- Cash at Bank 85,000
acquisition Sundry Debtors 75,000
Dividend 22,500 (Rs. 20,000 +
Unrealised Profit 2,000 1,41,750 Rs. 75,000 –
Rs. 20,000)
Bills Payable 40,000 Stock
Sundry Creditors : H Ltd. 1,00,000
H Ltd. 80,000 S Ltd. 90,000
S Ltd. 50,000 1,90,000
1,30,000 Less:
Less: Common 20,000 Unrealised 2,000
debts 1,10,000 Profit 1,88,000
9,79,250 9,79,250
Working Note:
(i) S Ltd.’s Profit and Loss Account
Particulars Rs. Particulars Rs.
To Dividend for 2007-08 By Balance b/d 50,000
@ 15% on Rs.2,00,000 30,000 By Net profit for the year
To Balance c/d 90,000 (balancing figure) 70,000
1,20,000 1,20,000
Net profit for the year ended 31st March, 2009 = Rs.70,000
Net profit for six months, i.e., Post-acquisition Profits = Rs.70,000 x 6/12
= Rs.35,000
H Ltd.’s share = 75% of Rs.35,000 = Rs.26,250
(ii) Capital Profits: Rs.
General reserve as on 1st April, 2008 60,000
Add: Balance of profit and loss account as on 1st April, 2008 50,000
Half of net profit for the year 2008-2009 35,000
1,45,000
Less: Dividend on equity share @15% 30,000
Capital profit 1,15,000
H Ltd.’s share = 75% of Rs.1,15,000 = Rs.86,250
(iii) Capital reserves on consolidation:
Paid up value of shares acquired 1,50,000
H Ltd.’s share of capital profits 86,250
Dividend received out of pre-acquisition profits 22,500
2,58,750
Less: Amount paid 2,40,000
Capital Reserve 18,750
(iv) Minority Interest:
Paid-up value of 500 shares in S Ltd. 50,000
25% of S Ltd.’s General reserve 15,000
25% of S Ltd.’s Profit and Loss Account 22,500
87,500
Question 3
The following balances have been extracted from the books of Pioneer Traders
Ltd. as on 30th September, 2009 :
(Rs. ’000)
Dr. Cr.
Share capital (Authorised and issued):
Equity (15,00,000 Shares of Rs.100 each) –– 1,50,000
8% Redeemable preference (40,000 shares) –– 4,000
Securities premium –– 2,500
Preference share redemption 4,800 ––
General reserve –– 10,000
Land (cost) 30,000 ––
Buildings (cost less depreciation) 70,000 ––
Furniture (cost less depreciation) 2,000 ––
Motor vehicle (cost less depreciation) 3,500 ––
Trading account – gross profit –– 90,000
Establishment charges 25,000 ––
Rate, taxes and insurance 1,200 ––
Commission 600 ––
Discount received –– 500
Interest on investments –– 800
Depreciation 6,000 ––
Sundry office expenses 6,000 ––
Payment to auditors 400 ––
Sundry debtors and creditors 10,660 2,560
Profit and loss account (as on 30.9.2008) –– 1,000
Unpaid dividend –– 200

Cash in hand 1,200 ––
Cash at bank in current account 19,500 ––
Security deposit 1,000 ––
Outstanding expenses –– 600
Investments in G.P. Notes 20,000 ––
Stock in trade (at or below cost) 35,300 ––
Provision for taxation (year ended 30.9.2008) — 7,000
Income-tax paid under dispute (year
ended 30.9.2008) 10,000 —
Advance payment of income-tax 22,000 —
2,69,160 2,69,160
The following further details are available :

(i) The preference shares were redeemed on 1st October, 2008 at a premium of
20% but no entries were passed for giving effect thereto, except payment
standing to the debit of preference share redemption account.
(ii) Depreciation as provided upto 30th September, 2009 is as follows :
(a) Building – Rs.2,10,00,000.
(b) Furniture – Rs.20,00,000.
(c) Motor vehicles – Rs.60,00,000.
(iii) Establishment charges include Rs.18,00,000 paid to managing director as
remuneration in terms of agreement which provides for a remuneration of 5%
of annual net profits.
(iv) Payment to auditors includes Rs.1,00,000 for taxation work in addition to
audit fees.
(v) Market value of investments on 30th September, 2009 is Rs.1,80,00,000.
(vi) Sundry debtors include Rs.40,00,000 due for a period exceeding six months.
(vii) All receivables and deposits are considered good for realisation.
(viii) Income-tax demand for the year ended 30th September, 2008
Rs.1,00,00,000 has not been provided for against which appeal is pending.
(ix) Income-tax is to be provided @ 34%. Also provide for tax on divisible profit @
16%.
(x) Directors recommended payment of dividend on equity shares at the rate of
12%.
(xi) Ignore previous year’s figures.
You are required to prepare the profit and loss account for the year ended 30th
September, 2009 and a balance sheet as at that date. (15 marks)
Answer 3
Profit and Loss Account of Pioneer Traders Ltd.
for the year ended 30th September, 2007
(Rs. in 000’s)
Dr. Cr.
Particulars Rs. Rs. Particulars Rs.
To Establishment By Gross profit b/d 90,000
Charges 25,000 By Discount received 500
Less: Remu- By Interest on Investment 800
neration to M.D. 1,800 23,200
To Rates, taxes and
insurance 1,200
To Commission 600
To Depreciation 6,000
To Sundry office
expenses 6,000
To Payment to
auditors:
Audit fees 300
Fees for taxation
work 100 400
To Remuneration to
managing director
@5% on Profits
Rs.53,900 (i.e.
Rs.91,300 –
Rs.37,400) 2,695
To Provision for
taxation 17,410
To Net Profit c/d 33,795 ______
91,300 91,300
To Provision for By Balance as per last year 1,000
taxation for the By Profit for the year b/d 33,795
year ended
30.9.2008 3,000
To General reserve 845
(2.5% of current
year’s profit)
To Proposed dividend
@ 12% on paid-up
capital 18,000
To Tax on Distributed
Profit @ 16% 2,880
To Balance c/d 10,070 ______
34,795 34,795
Balance Sheet of Pioneer Traders Ltd., as at 30th September, 2009

(Rs. in 000’s)
Liabilities Rs. Assets Rs.
Share Capital: Fixed Assets:
Authorised Capital - Land at Cost 30,000
15,00,000 Equity Shares Building at Cost 91,000
of Rs. 100 each 1,50,000 Less: Depre-
Issued and Subscribed ciation to date 21,000 70,000
Capital -
15,00,000 Equity Shares of Furniture 4,000
Rs. 100 each, fully paid-up 1,50,000 Less: Depre-
Reserves and Surplus: ciation to date 2,000 2,000
Capital Redemption
Reserve Account 4,000 Motor Vehicles 9,500
Securities Premium Account 1,700 Less: Depre-
General Reserve as ciation to date 6,000 3,500
per last year’s
Balance Sheet 10,000 Investments:
Less: Transfer to Investments in G.P.
Capital Redemption Note (market value
Reserve 4,000 Rs. 18,000 thousand) 20,000
6,000 Current Assets,
Added during Loans and Advances:
the year 845 6,845 A. Current Assets:
Profit and Loss Account 10,070 Stock-in-trade
Secured Loan: — (at or below cost) 35,300
Unsecured Loan: — Sundry Debtors:
Current Liabilities and Debts Outstanding
Provisions: For more than
A. Current Liabilities: 6 months 4,000
Sundry creditors 2,560 Other debts 6,660 10,660
Unpaid dividend 200 Cash in hand 1,200
Outstanding expenses 600 Bank balance in
Remuneration payable to Current Account 19,500
Managing Director: B. Loans and Advances:
Remuneration @ 5% on Security deposit 1,000
Net profit 2,695 Income-tax paid
Less: Amount Under dispute 10,000
already paid 1,800 895 Advance payment of tax 22,000
B. Provisions
Provision for taxation
for 2007-08 10,000
Provision for taxation
for 2008-09 17,410
Proposed dividend 18,000
Tax on Distributed Profit 2,880 _______
2,25,160 2,25,160
N.B. Alternatively, the balance sheet may be prepared in vertical form also.
Question 4
(a) Balance sheet of Diamond Ltd. as at 30th June, 2009 is given below :
Liabilities Rs.
Share capital : 40,000 Shares of Rs.10 each 4,00,000
General reserve 80,000
Profit and loss account 64,000
Sundry creditors 2,56,000
Income-tax reserve 1,20,000
9,20,000
Assets
Land and buildings 2,20,000
Plant and machinery 2,60,000
Patents and trade marks 40,000
Preliminary expenses 24,000
Stock 96,000
Debtors 1,76,000
Bank balance 1,04,000
9,20,000
The expert valuer valued the land and buildings at Rs.4,80,000, goodwill at
Rs.3,20,000 and plant and machinery at Rs.2,40,000. Out of the total
debtors, it is found that debtors of Rs.16,000 are bad. The profits of the
company have been as follows :
31st March, 2007 : Rs.1,84,000
31st March, 2008 : Rs.1,76,000
31st March, 2009 : Rs.1,92,000
The company follows the practice of transferring 25% of profits to general
reserve. Similar type of companies earn at 10% of the value of their shares.
Plant and machinery, and land and buildings have been depreciated at 15%
and 10% respectively. Ascertain the value of shares of the company by
using—
(i) Intrinsic value method;
(ii) Yield value method; and
(iii) Fair value method. (6 marks)
(b) Rax Ltd. invited applications from public for 1,00,000 equity shares of Rs.10
each at a premium of Rs.5 per share. The entire issue is underwritten by the
underwriters A, B, C, and D to the extent of 30%, 30%, 20%, and 20%
respectively with the provision of firm underwriting of 3,000, 2,000, 1,000 and
1,000 shares respectively. Underwriters are entitled to maximum commission
as per law. The company has received applications for 70,000 shares from
public out of which applications for 19,000, 10,000, 21,000 and 8,000 shares
were marked in favour of A, B, C and D respectively. Calculate the liability of
each underwriter treating firm underwriting on par with marked applications.
Also ascertain the underwriting commission @ 2.5% payable to each

underwriter. (6 marks)
(c) “Buy-back may be misused by the corporate entities at the cost of innocent
investors.” Give your comments. (3 marks)
Answer 4(a)
Diamond Ltd.
Valuation of shares
(i) Intrisic value method
Assets: Rs.
Land and buildings 4,80,000
Goodwill 3,20,000
Plant and machinery 2,40,000
Patents and trade marks 40,000
Stock 96,000
Debtors less bad debts 1,60,000
Bank balance 1,04,000
14,40,000
Less: Liabilities:
Sundry creditors 2,56,000
Net assets 11,84,000
Net Assets
Intrinsic value of shares (each share) =
No. of Shares
Rs. 11,84,000
= = Rs. 29.60
40,000
(ii) Yield value method

Rs.
Total profit of last three years 5,52,000
Less: Bad debts 16,000
5,36,000
Rs. 5,36,000
Average profit = = 1,78,667
3
Add: Decrease in depreciation on plant and
machinery @ 15% on Rs. 20,000 3,000
1,81,667
Less: Increase in depreciation on land and
building @ 10% on Rs. 2,60,000 26,000
Average profit 1,55,667
Less: Transfer to reserve
@ 25% of Rs. 77,833 38,917
Profit available for dividend 1,16,750

Rs.1,16,750
Rate of dividend = × 100 = Rs.29.187%
4,00,000
Rate of Dividend
Yield value of share = × Paid-up value of each share
Normal Rate of Return
29.187
= × 10 = Rs. 29.19
10
(iii) Fair value method
Intrinsic Value + Yield Value
Fair value of each share =
2
Rs. 29.60 + Rs. 29.19
= = Rs. 29.40
2
Answer 4(b)
Liability of Underwriters (No. of shares)
Particulars Total A B C D
Gross Liability 1,00,000 30,000 30,000 20,000 20,000
Less: Unmarked
Applications 12,000 3,600 3,600 2,400 2,400
Balance 88,000 26,400 26,400 17,600 17,600
Less: Marked Applications 58,000 19,000 10,000 21,000 8,000
Balance 30,000 7,400 16,400 − 3,400 9,600
Less: Firm Underwriting 7,000 3,000 2,000 1,000 1,000
Balance 23,000 4,400 14,400 − 4,400 8,600
Adjustment − −1,650 −1,650 +4,400 −1,100
Net Liability 23,000 2,750 12,750 − 7,500
Total Liability including
firm underwriting 30,000 5,750 14,750 1,000 8,500
Underwriting Commission
The underwriting commission is payable at the rate of 2.5% of the issue price of
shares.
2.5
Thus, commission payable to A = 30,000 × Rs. 15 × = Rs. 11,250
100
B = Rs. 11,250
2.5
C = 20,000 × Rs. 15 × = = Rs. 7,500
100
D = Rs. 7,500
Answer 4(c)
It is feared that the buy-back may be misused by the corporate entities at the cost
of innocent investors because of following reasons:
(i) It will provide ample opportunity for insider trading. The promoters, before the
buyback, may understate the earnings by manipulating accounting policies in
respect of depreciation, valuation of inventories, etc. and highlight other
unfavourable factors affecting the earnings. This would lead to a fall in the
quoted prices of shares and the promoter would buy then at low quotations.
In this manner, the insiders would make extra money when the company
buybacks these shares at a higher price.
(ii) Buyback may lead to artificial manipulation of stock prices.
(iii) The position of the minority shareholders is weakened as buyback enables
the management to increase their control over the company.
PART—B
Question 5
(a) State, with reasons in brief, whether the following statements are correct or
incorrect :
(i) Under Flux method, labour turnover is calculated by number of workers
left divided by average number of workers.
(ii) In cost plus contracts, the contractor runs a risk of incurring a loss.
(iii) There is no need to record attendance of piece rate workers since
attendance is not relevant for ascertaining the amount of wages to be
paid.
(iv) A profit centre whose performance is measured by its return on
investment (ROI) is known as investment centre.
(v) Contribution is not only the criterion for deciding profitability.
(2 marks each)
following :
(i) The rate of change of labour force in an organisation during a specified
period is called —
(a) Labour efficiency
(b) Labour turnover
(c) Labour productivity
(d) None of the above.
(ii) When a contract is not complete at the end of the year, profit on
incomplete contract —
(a) Is not considered
(b) Is considered for inclusion in the profit for the year
(c) Is considered for the inclusion of a part of the year

(iii) When prices fluctuate widely, the method that will avoid the effect of
fluctuations is —
(a) FIFO
(b) LIFO
(c) Simple average
(d) Weighted average.
(iv) Fixed costs remain fixed —
(a) Over a short period
(b) Over a long period and within relevant range
(c) Over a short period and within a relevant range
(d) Over a long period.
(v) When the under or over absorbed overheads amount is significant, it
should be disposed off by —
(a) Transferring to costing profit and loss account
(b) Using a supplementary rate
(c) Carry over to next year
(d) None of the above. (1 mark each)
(i) ______________ expenses are excluded from cost.
(ii) An account giving details of cost of production, cost of sales and profit
made during a particular period is called _____________.
(iii) The process of apportionment of factory overheads among production
and service department is called ____________ of factory overheads.
(iv) The time for which the employer pays remuneration to workers but
obtains no direct benefit is called ___________.
(v) A system that keeps a running and continuous record that tracks
inventories and cost of goods sold on day-to-day basis is
called________. (1 mark each)
Answer 5(a)
(i) Incorrect. Under flux method, labour turnover is calculated by dividing the
sum of number of workers left plus the number of workers joined, divided by
average number of workers.
(ii) Incorrect. In cost plus contracts, the contractor is assured of a fixed
percentage of profit over the total cost and there is no risk of incurring any
loss on the contract.
(iii) Incorrect. Under payment by result system, the payment made has a direct
relationship with the output given by a worker. The attendance of the worker
or the time taken by him for doing a job has no bearing on the payment.
However, to ensure discipline, incentive system, statutory obligation,
attendance record is must.
(iv) Correct. In investment centre, the manager is expected to earn a satisfactory
return on the assets employed in his responsibility centre which is measured
by ROI.
(v) Correct. Although to maximize profit, resources should be mobilized towards
that product which gives the maximum contribution. But in real life, there may
be several factors such as, demand for the product, production capacity,
availability of material, labour, capital, etc. which may put a limit on the
number of units to be produced even if the products give a high contribution.
Answer 5(b)
(i) (b) - Labour Turnover
(ii) (c) - Is considered for the inclusion of a part of the year
(iii) (d) - Weighted average
(iv) (c) - Over a short period and within a relevant range
(v) (b) - Using a supplementary rate
Answer 5(c)
(i) Notional expenses are excluded from cost.
(ii) An account giving details of cost of production, cost of sales and profit made
during a particular period is called production account.
(iii) The process of apportionment of factory overheads among production and
service department is called primary distribution of factory overheads.
(iv) The time for which the employer pays remuneration to workers but obtains no
direct benefit is called idle time.
(v) A system that keeps a running and continuous record that tracks inventories
and cost of goods sold on day-to-day basis is called perpetual inventory
system.
Question 6
Summarised income statement and balance sheet of Progressive Ltd. are given
below :
Income Statement for the year ended 31st December, 2009
(Rs. ’000)
Sales 1,600
Less: Cost of goods sold 1,310
Gross margin 290
Less: Selling and administration expenses 40
Net operating income (EBIT) 250
Less: Interest 45
Earnings before tax 205
Less : Tax paid 82
Net income after tax 123
Earnings per share (EPS) is Rs. 3.075.

Balance Sheet as at 31st December, 2009
Liabilities (Rs. ’000)
Paid-up capital (40,000 shares of Rs. 10 each fully paid) 400
Retained earnings 120
Debentures 700
Creditors 180
Bills payable 20
Other current liabilities 80
1,500
Assets
Net fixed assets 800
Inventory 400
Debtors 175
Marketable securities 75
Cash 50
1,500
Price per share is Rs.15.
Industry’s average ratios are :
Current ratio 2.4
Quick ratio 1.5
Sales to inventory 8.0
Average collection period 36 days
Price per share/book value of share 1.6
Debts to assets 40%
Times interest earned 6
Profit margin 7%
Price to earnings ratio 15
Return to total assets 11%
(i) Progresssive Ltd. would like to borrow Rs.5,00,000 from a bank for less than
a year. Evaluate the firm’s current financial position by calculating ratios that
you feel would be useful for the bank’s evaluation.
(ii) What problem areas are suggested by your ratio analysis ? What are the
possible reasons for them?
(iii) Do you think that the bank should give the loan?
(iv) If Progressive Ltd.’s inventory utilisation ratio (sales to inventory) and
average collection period were reduced to industry average, what amount of
funds would be generated? (15 marks)
Answer 6
Progressive Limited
Computation of Ratios for Evaluation
(Rs. in Thousands)
Firm’s Industry
Ratio Average
(a) Current Ratio = Current Assets/Current Liabilities
Current Assets = Rs.400 + 175 + 75 + 50 = Rs.700 2.5 2.4
Current Liabilities = Rs.180 + 20 + 80 = Rs.280
Current Ratio = 700/280
(b) Quick Ratio = Liquid Assets/Current Liabilities

Liquid Assets = Rs.175 + 75 + 50 = Rs.300 1.07 1.5
Quick Ratio = 300/280
(c) Sales to Inventory = Sales/Inventory
= 1,600/400 4 8
(d) Average Collection Period =

Debtors/Average Daily Sales 40 days 36 days
= 175/(1,600/365)
(e) Price per Share to Book Value of Share
= Price per share/Book value of share 1.15 1.6
= 15/(520/40)
Book value of share = (Paid-up capital + Retained
earnings)/No. of shares
(f) Debts to Assets = Debts/Assets
= (700/1,500) x 100 46.7% 40%
(g) Times EBIT = Earnings Before Interest and
Tax/Interest 5.56 6
= 250/45
(h) Profit Margin = (Net Profit/Sales) x 100
= (123/1,600) x 100 7.7% 7%
(i) Price to Earning Ratio = Price per Share/Earning
Per Share 4.88 15
= 15/3.075
(j) Return on total assets = Net profit/Total Assets
= (123/1,500) x 100 8.2% 11%
(i) Different relevant ratios have been calculated above. The final decision about
the loan of Rs.5,00,000 can be taken only after considering and analyzing
different ratios and firm’s problems.
(ii) Firm’s current ratio is more than industry ratio but quick ratio is less. The
difference in current and quick ratio is due to inventory of Rs.4,00,000 out of

current assets of Rs.7,00,000. The firm’s collection period is more than the
industry. If it has been increasing in the past, it is a danger signal. Sales to
inventory are low and less than industry. It may be due to damaged goods.
The credit policy should be reviewed to improve firm’s debts collection. Firm’s
debt to assets ratio is higher than the industry, which implies that the firm has
taken more loans. Even the interest coverage ratio is little lesser than the
industry. The creditors/lenders may not like to advance loans to the firm at
the current rate. Therefore, firm may have to pay higher interest in future.
The price earning ratio and price per share to book value is quite less than
industry. It may be due to higher loans and low utilization of assets. The
investment in the firm looks to be risky and it may have adverse effect on
firm’s future growth.
(iii) Keeping in mind the above analysis the bank cannot advance loan to the
firm. Even if the bank agrees for the loan, bank will demand higher rate of
interest.
(iv) The industry inventory turnover (sales to inventory) ratio is double the firm’s
ratio. If we use industry inventory turnover ratio, the firm should have
inventory of Rs.2,00,000 but actually its inventory is Rs.4,00,000. if this ratio
can be brought to industry level, Rs.2,00,000 can be generated. Based on
industry collection period, the receivables should be :
Average Daily Sales x Industry collection period
Rs.4,400 (approx.) x 36 days = Rs.1,58,400
Currently, debtors are Rs.1,75,000 and therefore a saving of Rs.16,600 is
possible. Therefore, Rs.2,16,600 (2,00,000 + 16,600) may be generated if
sales to inventory and average collection period is brought to industry level.
Question 7
(a) Write short notes on any two of the following :
(i) Superiority of zero base budgeting (ZBB) to traditional budgeting
(ii) Activity based costing
(iii) Cash, cash equivalents and cash flows. (3 marks each)
(b) Two manufacturing companies which have the following operating details
decided to merge :
Company–I Company–II
Capacity utilisation (%) 90 60
Sales (Rs. in lakhs) 540 300
Variable costs (Rs. in lakhs) 396 225
Fixed costs (Rs. in lakhs) 80 50
Assuming that the proposal is implemented, calculate ––
(i) Break-even sales of the merged plant and the capacity utilisation at that
stage.
(ii) Profitability of the merged plant at 80% capacity utilisation.

(iii) Sales turnover of the merged plant to earn a profit of Rs.75 lakh.
(iv) When the merged plant is working at a capacity to earn a profit of Rs.75
lakh, what percentage increase in selling price is required to sustain an
increase of 5% in fixed overheads ? (9 marks)
Answer 7(a)(i)
Superiority of zero base budgeting (ZBB) to traditional budgeting
Zero base budgeting is superior to traditional budgeting due the following
reasons:
(i) Zero base budgeting provides a systematic base for evaluation of different
activities.
(ii) It gives an opportunity for management to allocate resources to various
activities after a proper cost benefit analysis.
(iii) It assigns that the functions undertaken are critical for the achievement of the
objectives.
(iv) It provides a base for a system of management by objectives.
(v) It provides a close relationship between departmental budget and corporate
objectives / budget.
(vi) It helps in identifying wastage and their elimination.
Answer 7(a)(ii)
Activity based costing
It is a technique of costing which is basically used for apportionment of
overheads costs in an organisation having products that differs in volume and
complexity of production. Under this technique, the overhead costs of the
organizations are identified with each activity which is acting as the cost driver, i.e.
the cause for incurrence of overhead cost. Such cost drivers may be purchase orders
issued, quality inspections, maintenance requests, material receipts, inventory
movements, power consumed, machine time, etc. Having identified the overhead
costs with each cost centre, cost per unit of cost driver can be ascertained. The
overhead costs can be now assigned to jobs on the basis of the number of activities
required for their completion. Therefore, ABC technique – is a technique which
involves identification of costs with each cost driving activity and making it as the
basis for apportionment of costs over different products or jobs. In other words, it is a
technique of cost attribution to cost units on the basis of benefits received from
indirect activities, i.e. ordering, setting up and assuring quality.
Answer 7(a)(iii)
Cash, cash equivalent and cash flows
Cash comprises cash in hand and demand deposits with banks. Demand
deposits mean those deposits which are repayable by banks on demand by the
depositor.
Cash equivalents are short term, highly liquid investments that are readily
convertible into known amounts of cash and which are subject to an insignificant risk
of changes in value. Cash equivalents are held for the purpose of meeting short term
cash commitments rather than for investments or other purposes.
Cash flows are inflows and outflows of cash and cash equivalents. It means the
movement of cash into the organisation and movement of cash out of the
organization. The difference between cash inflows and outflows is known as net cash
flow which can be either net cash inflow or net cash outflow.
Answer 7(b)
(i) Position of the Merged Plant at 100% capacity
(Rs. in lakhs)
Company I Company II Total
Sales 600 500 1,100
Less: Variable Costs 440 375 815
Contribution 160 125 285
Less: Fixed Costs 80 50 130
Profit 80 75 155
P/V Ratio of the merged plant = [(Contribution ÷ Sales) x (100)]
285
= × 100 = 25.909%
1,100
(Rs. in lakh)
Fixed Cost 130 × 1,100
Break even sales of the merged plant = = = Rs.501.75 lakhs
P/V Ratio 285
501.75
Per cent of capacity utilization = × 100 = 45.61%
1,100
(ii) Profitability of the merged plant at 80% capacity

Rs.(Lakh)
Sales (at 80% capacity i.e., 80% of Rs.1,100 lakh) 880
Less: Variable Costs (80% of Rs.815 lakh) 652
Contribution 228
Less: Fixed costs 130
Profit 98
OR
Total contribution at 80% capacity = 285 lakh x 80% = 228
Less: Fixed Costs 130
Profit 98
98
Profitability = × 100 = 11.14%
880
(iii) Sales required to earn a profit of Rs.75 lakh :

Fixed Costs + Desired Profit Rs.130 lakh + Rs. 75 lakh
= =
P/V Ratio 285/1100
OR
205 × 1,100
= = Rs.791.23 lakh
285
(iv) Percentage of increase in selling price to sustain 5% increase in fixed overheads:
130 × 5
5% of fixed cost = = Rs.6.5 lakh
100
6.5
Percentage increase in selling price = × 100 = 0.8215%
791.23
Question 8
(a) A company manufactures 5,000 units of a product per month. The cost of
placing an order is Rs.100. The purchase price of the raw material is Rs.10
per kg. The re-order period is 4 to 8 weeks. The consumption of raw
materials varies from 100 kgs. to 450 kgs. per week, the average
consumption being 275 kgs. The carrying cost of inventory is 20% per
annum. You are required to calculate ––
(i) Re-order quantity
(ii) Re-order level
(iii) Maximum level
(iv) Minimum level
(v) Average stock level.
Assume 52 weeks in a year. (6 marks)
(b) Following information is available for a factory for the year 2008 :
Rs.
Direct material 3,00,000
Direct wages 2,50,000
Factory overheads 1,50,000
Administrative overheads 1,68,000
Selling overheads 1,12,000
Distribution overheads 70,000
Profit 2,10,000
A work order has been executed in the year 2008 and the expenses incurred
were — materials Rs.4,000; and wages Rs.2,500.
Assuming that in the year 2009 the rate of factory overheads has increased
by 20%, distribution overheads have gone down by 10% and selling and
administration overheads have each gone up by 12.5%, at what price should
the product be sold so as to earn the same rate of profit on the selling price
as in the year 2008 ? Factory overheads are based on direct wages while
other overheads are based on factory cost. (9 marks)
Answer 8(a)
2U × P
(i) Re-order Quantity =
S
2 × 14,300 × Rs.100
=
2
= 1,196 Kgs.
Where –
U = Annual Requirement = 275 kgs. per week for 52 weeks = 14,300
P = Ordering Cost = Rs.100 per order
S = Carrying Cost per unit per annum = 20% of Rs. 10 = Rs. 2
(ii) Re-order Level = Maximum Consumption x Maximum Re-order Period
= 450 Kgs. x 8 (weeks) = 3,600 Kgs.
(iii) Minimum Stock Level
= Re-order Level + Re-order Quantity – (Minimum Consumption x Minimum
Re-order Period)
= 3,600 Kgs. + 1,196 Kgs. – (100 Kgs. X 4 weeks)
= 3,600 Kgs. + 1,196 Kgs. – 400 Kgs
= 4,396 Kgs.
(iv) Minimum Stock Level
= Re-order level– (Normal Consumption x Normal Re-order Period)
= 3,600 Kgs. – (275 Kgs. X 6 weeks)
= 3,600 Kgs. – 1,650 Kgs.
= 1,950 Kgs.
(v) Average Stock Level = Minimum Level + ½ of Re-order Quantity
= 1,950 Kgs. + ½ x 1,196 Kgs.
= 1,950 Kgs. + 598 Kgs.
= 2,548 Kgs.
OR
Maximum Level + Minimum Level
2
6346
= 4,396 Kgs. + 1950 Kgs. = = 3173 Kgs.
2
Answer 8(b)
Statement of Cost and Profit for the year 2008
Particulars Rs.
Materials 3,00,000
Direct Wages 2,50,000
Prime Cost 5,50,000
Factory Overheads 1,50,000
Factory Cost 7,00,000

Administration Overheads 1,68,000
Cost of Production 8,68,000
Selling Overheads 1,12,000
Distribution Overheads 70,000
Cost of Sales 10,50,000
Profit 2,10,000
Sales 12,60,000
(a) Percentage of Factory overheads on direct wages
= 1,50,000 / 2,50,000 x 100 = 60%
(b) Percentage of Administrative overheads on factory cost
= 1,68,000 / 7,00,000 x 100 = 24%
(c) Percentage of Selling overheads to factory cost
= 1,12,000 / 7,00,000 x 100 = 16%
(d) Percentage of Distribution overheads to factory cost
= 70,000 / 7,00,000 x 100 = 10%
(e) Percentage of Profit on cost of sales
= 2,10,000 / 10,50,000 x 100 = 20%
Estimate for the work order
Particulars Rs.
Materials 4,000
Wages 2,500
Prime Cost 6,500
Factory Overheads (60% of wages + 20% thereof) i.e. 72% of wages 1,800
Factory Cost 8,300
Administration Overheads (24% of factory cost + 12.5% thereof) i.e. 2,241
27% of factory cost
Cost of Production 10,541
Selling Overheads (16% of factory cost + 12.5% thereof) i.e. 18% of
factory cost 1,494
Distribution Overheads (10% of works cost - 10% thereof) i.e. 9% of 747
factory cost
Cost of Sales 12,782
Profit (20% on cost) 2,556
Selling Price 15,338
TAX LAWS
NOTE: All references to sections mentioned in Part-A of the Question Paper relate to
the Income-tax Act, 1961 and the relevant Assessment Year 2010-11 unless
stated otherwise.
Question 1
(a) Choose the most appropriate answer from the given options in respect of the
following having regard to the provisions of the relevant direct tax laws :
(i) Which of the following income is agricultural income —
(a) Rent received from agricultural land
(b) Income from dairy farm
(c) Income from poultry farm
(d) Dividend from a company engaged in agriculture.
(ii) The term ‘income’ includes the following types of incomes —
(a) Legal
(b) Illegal
(c) Legal and illegal both
(iii) Every year, the residential status of an assessee —
(a) May change
(b) Will certainly change
(c) Will not change
(iv) Sneha is an employee in a private company. In the previous year she
received salary Rs.1,80,000 and entertainment allowance Rs.12,000.
She spent Rs.6,000 on entertainment. Under section 16(ii), she is entitled
to deduction of —
(a) Rs.12,000
(b) Rs.6,000
(c) Rs.5,000
(d) Nil.
(v) In whose total income, the income of a minor child is included —
(a) Father
(b) Mother
(c) Father and mother both
(d) Parent whose total income is greater. (1 mark each)
(b) State, with reasons in brief, whether the following statements are correct or
41
EP-TL-June 2010 42
incorrect :
(i) An Indian company is always resident in India no matter where and to
what extent its control and management is situated.
(ii) Rent from house property let-out by an assessee to his employees when
such letting is incidental to his main business, will be chargeable to tax
under the head ‘income from house property’.
(iii) Income by way of winnings from lotteries in the hands of a dealer as a
regular business activity is not chargeable to tax under the head ‘profits
and gains of business or profession’.
(iv) Income from transfer of self-generated goodwill of a profession is not
chargeable to tax under the head ‘capital gains’.
(v) Literary awards instituted by the Central Government are exempted from
income-tax. (1 mark each)
(c) Particulars of income received by Mrs. Sarita for the year ended 31st March,
2010 are as follows :
(i) Family pension received from the Government of Madhya Pradesh
Rs.15,000.
(ii) Royalty received from a publisher Rs.42,700. She spent Rs.2,700 on
books, stationery, typing, etc.
(iii) Winnings from lotteries (gross) Rs.90,000.
(iv) Winnings from horse race (net) Rs.35,000.
(v) Interest from tax-free debentures of a public company (listed) Rs.18,000.
(vi) Interest on tax-free notified government bonds Rs.10,000.
(vii) Dividend received from a foreign company (net) Rs.8,000. Nothing has
been paid to the Government of India out of tax deducted at source.
From the above information, compute income from other sources of
Mrs.Sarita for the assessment year 2010-11. (5 marks)
Answer 1(a)
(i) (a) Rent received from agricultural land
(ii) (c) Legal and illegal both
(iii) (a) May change
(iv) (d) Nil
(v) (d) Parent whose total income is greater.
Answer 1(b)
(i) Correct: According to Section 6(3) of the Income-tax Act, 1961, an Indian
company is always resident in India no matter where and to what extent its
control and management is situated.
43 EP-TL-June 2010
(ii) Incorrect: The residential quarters let out by the assessee to his employees
for the purpose of his business shall not be chargeable under section 22 of
the Act as ‘Income from house property’ same judgment given in CIT v. Delhi
Cloth and General Mills Ltd. [1966] 59 ITR 152.
(iii) Incorrect: Income by way of winnings from lotteries in hands of a dealer as
regular business activity shall be chargeable under the head Income from
“Profits and gains of business or Profession” as decided in Director of State
Lotteries v. Asstt. (IT (2000) 108 Taxmann (Gauhati)
(iv) Correct: When it is not possible to ascertain the cost of acquisition and
improvement which is required to be deducted from the full value of
consideration while computing income from capital gains, then income from
transfer of such asset is not taxable. This has been so held by the Supreme
Court in CIT v. B C Srinivasa Setty [1981] 5 Taxmann. However, as per the
Amendments made in the Act by the Government, this judgment is not
applicable in the case of certain other self-generated assets.
(v) Correct: Under Section 10(17A) of the Act, any payments made in cash or
kind in pursuance of any award instituted in the public interest by the
Government or instituted by any other body and approved by the Central
Government is exempt from tax.
Answer 1(c)
Computation of Income from other sources
for the Assessment Year 2010-11
Rs. Rs.
(i) Family pension received from
Government of M.P. 15,000
Less : 1/3 rd exempt u/s 57 5,000 10,000
(ii) Royalty 42,700
Less : Expenses 2,700 40,000
(iii) Winning from lottery 90,000
(iv) Winning from Horse Races
Grossed up (35,000 x 100)/ 70 50,000
(v) Interest from tax free debentures of a Public Company 20,000
Grossed up (18,000 x 100)/90
(vi) Interest from tax free notified Govt. Bonds Exempt
(vii) Dividend from a Foreign Company 8,000
Income from Other Sources 2,18,000
Question 2
(a) Re-write the following sentences after filling-in the blank spaces with
(i) The maximum exemption limit under the Income-tax Act, 1961 in case of
a woman who is less than 65 years of age and who is non-resident in
India is Rs.______________.
(ii) The time limit for filing an appeal before the appellate tribunal on receipt
EP-TL-June 2010 44
of an appeal order from the commissioner is _________ days.

(iii) Wealth-tax is charged at the rate of _________ % on net wealth in
excess of Rs. _________ lakh under the Wealth-tax Act, 1957.
(iv) Business loss relating to illegal business is _________ as deduction.
(v) Marriage gift from a non-relative is _________ to tax. (1 mark each)
(b) Write short notes on any two of the following :
(i) Belated return
(ii) Taxation of zero coupon bonds
(iii) Profit in lieu of salary. (3 marks each)
(c) Discuss the procedure for rectification of mistakes under the Income-tax Act,
1961. (4 marks)
Answer 2(a)
(i) Rs.1,60,000
(ii) 60 days
(iii) One percent, 30 lakh
(iv) Not allowable
(v) Not chargeable
Answer 2(b)(i)
Belated return
Any person who has not furnished a return of Income within the time allowed to
him under Section 139(1) or within the time allowed under a notice issued under
Section 142(1) may furnish the return for any previous year at any time before the
expiry of one year from the end of relevant assessment year or before the completion
of the assessment whichever is earlier. In case of belated return, the assessee will be
liable to pay interest under section 234A, capital gain loss or business loss can not be
carry forward, and no deduction under section 10A, 10B, 80-IA, 80-IB etc. will be
allowed.
Answer 2(b)(ii)
Taxation of zero coupon bonds
The profits arising on the transfer of zero coupon bonds shall be chargeable
under the head capital gains. Further Section 2(42A) has been amended to provide
that if such zero coupon bonds are held for not more than 12 months such capital
asset shall be treated as short-term capital asset and hence shall be subject to short-
term capital gain. On the other hand where these bonds are held for more than 12
months such capital gain shall be treated as long-term capital gain.
As per section 112(1) where the tax payable in respect of any income arising
from the transfer of a long-term capital assets being zero coupon bonds exceed 10%
of the amount of capital gain before giving effect to the provisions of the second
proviso to Section 48 (i.e. before giving effect to indexed cost) such excess shall be
45 EP-TL-June 2010
ignored for the purpose of computing the tax payable by the assessee. In other words
long-term capital gain shall be chargeable to tax at 10% of LTCG before indexation of
cost of such bonds.
Answer 2(b)(iii)
Profit in lieu of salary
Under section 17(3) of the Income Tax Act the following are deemed to be the
profits in lieu of or in addition to salary and are taxable in the hands of employee:
1. Terminal compensation: The amount of any compensation due to or
received by an assessee from his employer or former employer at or in
connection with the termination of his employment or the modification of the
terms and conditions.
2. Payment from an unrecognized provident fund or an unrecognized
superannuation fund: Payment due to or received by an assessee from an
unrecognized provident fund or an unrecognized superannuation fund to the
extent of employer’s contribution till date and interest thereon.
3. Payment under Keyman Insurance Policy: Any payment due to or
received by an employee, under a Keyman Insurance Policy including the
sum allocated by way of bonus on such policy, will also be regarded as profit
in lieu of salary.
4. Any amount due or received before joining or after cessation of
employment: Any amounts due to or received, whether in lump sum or
otherwise by any assessee from any person :
(a) Before his joining any employment with that person; or
(b) After cessation of his employment with that person.
Answer 2(c)
Rectification of Mistakes
Under section 154 of the Income Tax Act with a view to rectify any mistake
apparent from the records the Income tax Authorities referred in Section 116 may
amend any order passed by it under provisions of this Act and also amend any
intimation/deemed intimation under section 143(1) or enhance or reduce the amount
of refund granted by it under that sub-section. This power of rectification can be
exercised by the authorities either on their own motion or on application made by the
assessee.
The mistake sought to be rectified may be a mistake of facts or of law. But the
mistake must be one which is glaring, obvious or apparent from the records and
should not be one to discover with a long drawn process of reasoning, arguments etc.
are needed or for which there may be conceivably two opinions.
The power of rectification of mistake lies with the authority who passed the order
which is sought to be rectified.
Where an order of rectification of assessment has the effect of enhancing the
EP-TL-June 2010 46
amount of income assessed or reducing a refund granted to the assessee or in any

way otherwise increasing the liability of the assessee a notice of demand and an
opportunity of being heard must be given to the assessee.
The time limit for rectification of mistakes is a period of four years from the end of
financial year in which the order sought to be amended was passed.
Question 3
(a) An asset is transferred by a person to another person under a partly
revocable transfer whereby a part of the asset will revert back to the
transferor. Who shall be liable to pay tax in respect of income from the asset
transferred as per section 61 ? (2 marks)
(b) Distinguish between any three of the following :
(i) ‘Mercantile system of accounting’ and ‘cash system of accounting’.
(ii) ‘Free trade zone’ and ‘special economic zone’.
(iii) ‘Exemption to capital gains under section 54G’ and ‘exemption to capital
gains under section 54GA’.
(iv) ‘Intra-head adjustment’ and ‘inter-head adjustment’. (2 marks each)
(c) Ram and Shyam are partners in Mozart Co., a partnership firm, which is
engaged in manufacturing carpets. They share profits and losses in the ratio
of 2:3. The profit and loss account of the firm for the year ended 31st March,
2010 is as follows :
Liabilities Rs.
Cost of goods sold 10,00,000
Depreciation 50,000
Salary to staff 1,00,000
Remuneration to partners :
Ram Rs. 2,50,000
Shyam Rs. 1,20,000 3,70,000
Interest on capital @15% :
Ram Rs. 45,000
Shyam Rs. 67,500 1,12,500
Sundry expenses 1,00,500
Net profit 7,35,200
24,68,200
Assets
Sales 23,00,000
Dividends 28,200
Winnings from lotteries (Rs.2,00,000) 1,40,000
24,68,200
Additional information :
(i) The firm donated Rs.30,000 to National Defence Fund and this amount is
47 EP-TL-June 2010
included in sundry expenses.

(ii) Depreciation admissible under the income-tax rules is Rs.68,000.
(iii) The firm is evidenced by partnership deed.
Compute the taxable income and amount of tax liability of the firm for the
assessment year 2010-11. (7 marks)
Answer 3(a)
By virtue of section 61, if an asset is transferred under a ‘revocable transfer’,
income from such asset is taxable in the hands of the transferor as and when the
power to revoke arises, ‘Transfer’ for this purpose includes any settlement, trust,
covenant, agreement or arrangement. The section does not speak of an absolute or
unqualified power of revocation. The transferor will be taxable even if the power to
revoke has not been exercised so far.
Answer 3(b)(i)
Mercantile system of accounting and cash system of accounting
Under the mercantile method of accounting, income and expenditure are
recorded at the time of their occurrence during the previous year while under the
cash method, revenue and expenses are recorded only when actually received or
paid. Under the mercantile method, income accrued during the previous year is
recorded whether it is received during the previous year or during any other year
while under the cash system, income received during the previous year is included in
taxable income whether it is earned during the previous year or during any other
year. Under the mercantile method, expenditure is recorded when it becomes due
during the previous year irrespective of the fact whether it is paid during the previous
year or not while under the cash system, expenditure is deductible from the taxable
income only if it is paid during the previous year irrespective of the fact whether it
relates to the previous year or not under the mercantile method, profit is the amount
which represents the amount of earnings accrued during the previous year though
not necessarily released in cash while under the cash system income is represented
by excess of receipts over disbursements during the previous year.
Answer 3(b)(ii)
Free trade zone and special economic zone
Provisions relating to free trade zone are given under section 10A while
provisions relating to ‘special economic zone’, are given under section 10AA of the
Act. In order to get benefit under section 10A, an undertaking must begin
manufacture or production during the financial year 1980-81 or any subsequent year
while under section 10AA the entrepreneur must begin to manufacture or produce
articles or things or provide services during the financial year 2005-06 or any
subsequent year. If a unit is eligible to get deduction under section 10AA, it cannot
get the benefit of deduction under section 10A. The maximum period of availability of
deduction under section 10A is 10 years while the period of availability of deduction
under section 10AA is 15 years. The requirement of debiting 50% of the amount of
profit to ‘Special Economic Zone Re-investment Reserve Account’ under section 10A
EP-TL-June 2010 48
starts from the eighth year from the previous year in which the undertaking begins to
manufacture or produce articles or things while under section 10AA this requirement
of debiting 50% of the profits to ‘Special Economic Zone Re-investment Reserve
Account’ starts from the eleventh year from the previous year in which the unit begins
to manufacture or produce articles or things or provide services.
Answer 3(b)(iii)
Exemption under section 54G is available in respect of transfer of asset in the
case of shifting of industrial undertaking from urban area to any area other than urban
area while exemption under section 54GA is available in case of shifting of an
industrial undertaking from urban area to a special economic zone which may be
situated in urban area.
Answer 3(b)(iv)
Intra-head adjustment and inter-head adjustment
The provisions relating to inter-source adjustment have been given under section
70 while the provisions relating to inter-head adjustment are given under section 71
of the Act. In case of Intra head adjustment, loss from a source is allowed to be
adjusted against income from another source within the same head of income. In
case of inter head adjustment, loss under one head of income can be adjusted
against income under another sources. As per section 70, long-term capital loss
cannot be set-off from short-term capital gains, while as per section 71, neither long-
term capital loss nor short-term capital loss can be set off from income under other
heads of income. As per section 71, loss from business or profession cannot be set
off against income under the head “salaries”. There is no parallel restriction under
section 70.
Answer 3(c)
Computation of Taxable Income of Mozart Co. a firm
for the Assessment Year 2010-11.
Particulars Amount (Rs.)
Computation of book Profits :
Net Profit as per Profit & Loss A/c 7,35,200
Add :Inadmissible expenses :
Donations 30,000
Interest on capital in excess of 12%
Ram 9,000
Shyam 13,500 22,500
Remuneration to partners 3,70,000 4,22,500
11,57,700
Less: Non-business incomes credited to P&L A/c :
Dividends 28,200
Winnings from lotteries 1,40,000 1,68,200
9,89,500
Less : Depreciation under charged 18,000
Book Profits 9,71,500
49 EP-TL-June 2010
Computation of remuneration allowable to Partners :

On first Rs.3,00,000 @ 90% or Rs.1,50,000 2,70,000
On balance Rs.6,21,500 @ 60% 3,72,900
Maximum permissible amount 6,42,900
Actual amount of remuneration is Rs.3,70,000
Therefore, amount allowable as remuneration to partners will be Rs.3,70,000
Income under head PGBP:
Book Profits 9,71,500
Less: Remuneration to partners 3,70,000
6,01,500
Income from other Sources :
Winnings from lotteries 2,00,000
Dividends Exempt
2,00,000
GTI 8,01,500
Less: Deduction under Chapter VI
Under section 80G (100%) 30,000
Total Income 7,71,500
Computation of amount of Tax
On winnings from lotteries [30% on Rs.2,00,000] 60,000
On balance of income @ 30%
[Rs.7,71,500 – Rs.2,00,000] 1,71,450
2,31,450
Add: EC & SHEC (3%) 6,944
2,38,394
Less: TDS on winnings from lotteries [30% on Rs.2,00,000] 60,000
Tax Payable 1,78,394
Tax payable rounded off 1,78,390
Question 4
(a) Raman has following assets and liabilities as on 31st March, 2010. Compute
his net wealth and wealth-tax liability for the assessment year 2010-11 :
Market Value
(Rs.)
(i) Cash in hand 75,000
(ii) Cash at bank 10,00,000
(iii) Residential house (Loan taken to purchase this
house Rs.5,00,000) 45,00,000
(iv) Land in rural area (it is within 5 kms. from Delhi) 48,00,000
(v) Land in urban area (construction not permitted
under the law, loan taken to purchase this
land Rs.3,00,000) 28,00,000
(vi) Motor car for personal use 14,00,000
EP-TL-June 2010 50
(vii) Jewellery 6,00,000

(viii) Aircraft for personal use (Loan taken to purchase
aircraft Rs.20,00,000) 1,00,00,000
(ix) Farm house situated within 20 kms. from local
limits of municipality 24,00,000
(x) One let-out residential house given on rent
throughout the year (Loan taken to construct
this house Rs.2,00,000) 20,00,000
(5 marks)
(b) State the provisions regarding deduction of tax at source in respect of the
following incomes :
(i) Winnings from horse races.
(ii) Payment by way of fees or royalty for professional or technical services.
(iii) Payment of compensation on acquisition of immovable property.
(2 marks each)
(c) Discuss the cases in which payment by way of loan/advance to the extent of
accumulated profits by a closely held company is treated as dividend under
section 2(22)(e). (4 marks)
Answer 4(a)
Computation of net wealth of Mr. Raman
Particulars Amount (Rs.)
(i) Cash in hand (in excess of Rs.50,000) 25,000
(ii) Cash at bank (not an asset) ---
(iii) Residential house (exempt under section 5(vi) ---
(iv) Land in rural area (being within 5 kms.
from municipal limits of Delhi) 48,00,000
(v) Land in urban area (not taxable because
construction is not permitted) ---
(vi) Motor Car for personal use 14,00,000
(vii) Jewellery 6,00,000
(viii) Aircraft for personal use 1,00,00,000
(ix) Farm house (being situated within 25 kms.
from local limits of municipality 24,00,000
(x) Let out residential house (not an asset because given
On rent throughout the year) _________
Gross Wealth 1,92,25,000
Less: Loan on Aircraft 20,00,000
Net Wealth 1,72,25,000
Amount of Wealth Tax Payable by Mr. Raman
1% of [Rs.1,72,25,000 – 30,00,000] 1,42,250
51 EP-TL-June 2010
Note: The amount of loan borrowed in respect of non-taxable assets will not be
taken into consideration.
Answer 4(b)
(i) Winnings from horse races:
Tax is deductible at source from any income by way of winnings from horse races
under section 194BB @ 30% (from 1st Oct. 2009 surchage and education cess shall
not be applicable). TDS is applicable only when income by way of such winnings paid
to a person exceeds Rs.2,500.
(ii) Payment by way of Fees or Royalty for professionals or technical services:
TDS on fees for professional or technical services or royalty is payable under
section 194J. TDS in such a case is generally deductible by a person other than an
individual or HUF who is responsible for paying to a resident person any sum by way
of fees for professional services, or fees for technical services or royalty. Tax shall be
deducted @10% (from 1st Oct. 2009 surcharge and education cess shall not be
applicable). TDS does not apply when amount of such sum or aggregate of the
amount of sums credited or paid or likely to be credited or paid during the financial
year to the account of the payee does not exceed Rs.20,000 individually for
payments for professional services, technical service for royalty or receipts in the
nature of non-compete fees and exclusivity rights.
(iii) Payment of compensation on acquisition of immovable property:
TDS in respect of payment of compensation on acquisition of immovable property
is covered under section 194LA. Any person who is responsible for paying to a
resident any compensation/consideration on account of compulsory acquisition of any
immovable property other than agricultural land is responsible for deducting TDS, Tax
is deductible at the time of payment of the sum in cash or by issue of a cheque or
draft or by any other mode, whichever is earlier. Tax is deductible @10% (from 1st
Oct. 2009 surcharge and education cess shall not be applicable) However, tax is not
deductible if the aggregate amount during a financial year does not exceed Rs.1 lac.
Answer 4(c)
Payment by way of loan/advance to the extent of accumulated profits by a
closely-held company is treated as dividend under section 2(22)(e) in the following
cases:
Loan or advance is given by a closely held company to a registered shareholder
directly or it may be given for the benefit of shareholder or on behalf of shareholder.
The shareholder getting the loan beneficially holds 10% or more of equity shares in
the company which gives the loan. Such loan or advance is treated as dividend in the
hands of the shareholder.
Loan or advance is given by a closely-held company to a concern which may be
a HUF, sole proprietor, firm, AOP, BOI or a company; one of the shareholders,
beneficially holding at least 10% equity share capital in loan giving company, has a
substantial interest in the concern. A person shall be deemed to have a substantial
interest in an concern, if he is at any time during the previous year, beneficially,
EP-TL-June 2010 52
entitled to at least 20% of income of such concern; if such concern is a company then
he should beneficially hold at least 20% equity share capital of the company. Such
loan or advance is treated as dividend in the hands of the concern.
Loan or advances given to any person on behalf or for the benefit of the
shareholder holding 10% share in the loan giving company.
Question 5
(a) Amit is a cloth merchant in Ghaziabad. From the following profit and loss
account for the year ended 31st March, 2010, compute his taxable income
and tax payable for the assessment year 2010-11 :
Rs. Rs.
Opening stock 1,00,000 Sales 40,00,000
Purchases 25,00,000 Closing stock 3,00,000
Reserve for bad debts 10,000 Gift form friend 70,000
Household expenses 20,000 Gift from brother 80,000
Advertisement 40,000
Depreciation 20,000
Salaries and wages 1,20,000
Reserve for future
losses 20,000
Travelling expenses 15,000
Expenditure on
scientific research 50,000
Net profit 15,55,000 ________
44,50,000 44,50,000
Additional information :
(i) Household expenses include an amount of Rs.5,000 paid for premium on
life insurance policy of Amit.
(ii) Depreciation admissible as per the income-tax rules is Rs.30,000.
(iii) Advertisement costing Rs.10,000 appeared in a newspaper owned by a
political party is included in the total amount spent on advertisement.
(iv) Expenditure on air fare from Delhi to Bangalore and from Bangalore to
Delhi of a sales manager costing Rs.10,000 is included in travelling
expenses. The sales manager is otherwise entitled for a second class AC
train where the expenditure would be Rs.4,000.
(v) Expenditure on scientific research relates to the money spent by Amit on
conducting research relating to the business of cement which he
proposes to undertake in future. (7 marks)
(b) Explain with the help of suitable illustration how capital gains are computed
under section 45(2) in case of conversion of capital asset into stock-in-trade.
(4 marks)
(c) Describe the powers of Central Board of Direct Taxes (CBDT) under the
Income-tax Act, 1961. (4 marks)
53 EP-TL-June 2010
Answer 5(a)
Computation of total Income of Mr. Amit
for the Assessment Year 2010-11
Particulars Amount(Rs.)
Income from business:
Net profit as per Profit & Loss A/c 15,55,000
Add: Inadmissible expenses
Household expenses 20,000
Advertisement 10,000
Expenditure on scientific research 50,000
Reserve for bad debts 10,000
Reserve for future losses 20,000 1,10,000
Less: Non-business incomes credited to Profit & Loss A/c
Gift from friend 70,000
Gift from brother 80,000 1,50,000
15,15,000
Less: Depreciation undercharged 10,000
Income from business 15,05,000
Income from other sources:
Gift from friend 70,000
Gross Total Income 15,75,000
Less: Deduction under section 80-C
Life Insurance premium 5,000
Total Income 15,70,000
Answer 5(b)
Conversion of investment into stock-in-trade of a business carried on under
section 2(47) with effect from the Assessment Year 1985-86 will be treated as
‘transfer’ in the year in which capital asset is converted into stock-in-trade. The
notional profit arising from transfer by way of conversion of capital asset into stock-in-
trade is chargeable to tax in the year in which stock-in-trade is sold. If stock-in-trade
is sold in parts in different years, tax on capital gains on conversion of capital asset
into stock-in-trade as per Section 45(2), can be said to arise in parts in different years
and not in one year in which last of stock-in-trade is sold. For the purposes of
computing capital gains in such cases, the fair market value of the capital asset on
the date on which it was converted or treated as stock-in-trade shall be deemed to be
the full value of consideration received or accruing as a result of the transfer of the
capital asset.
Suppose Mr. X converts his capital asset into stock-in-trade on February, 28,
1985. Fair market value on the date of conversion is Rs.4,00,000. He acquired the
asset on August 16, 1970 for Rs.50,000; fair market value on April 1, 1981 is
Rs.70,000. he sells the asset on September 10, 2008 for Rs.8,00,000, what will be
the amount of long-term capital gains and assessable business profits chargeable to
tax taking the CII for 1984-85 to be 125 and for 2008-09 to be 582?
Solution: By virtue of section 45(2), long-term capital gains will be taxable for the
EP-TL-June 2010 54
Assessment Year 2009-10 – the year of transfer of the asset.

Rs.
Full value of consideration (FMV on date of conversion) 4,00,000
Less: Indexed cost of acquisition
[70,000 x 125/100] 87,500
LTCG 3,12,500
Business Profits chargeable to tax for the Assessment Year 2009-10 will be:
Sales consideration 8,00,000
Less: FMV on the date of conversion 4,00,000
Business Profits 4,00,000
Answer 5(c)
The CBDT has been vested with a wide variety of powers important among which
are as follows :
(i) CBDT has the power to make rules for carrying out the purpose of the Act.
(ii) It may issue, orders, instructions and direction to all officers and persons
employed in the executions of the Act. However, it cannot interfere with the
discretion of the Commissioner (Appeals) in the exercise of appellate
functions and it cannot direct the Assessing Officer to make a particular
assessment in a particular manner.
(iii) It may declare any organization as a company.
(iv) It may direct that income from property held under trust should not form part
of the total income of the recipient.
(v) It may notify any profession under which it will be compulsory to maintain
accounts and to make rules regarding maintenance of accounts.
(vi) It may specify the Income Tax authorities who are empowered to issue
summons for search and seizures.
(vii) To require any authority under any law to disclose information regarding any
assessee.
(viii) It may condone the delay in obtaining approval of the Board, wherever such
approval is required.
(ix) It may prescribe educational qualifications for a person to qualify to be an
authorised representative.
(x) It may give directions to Income Tax Authorities regarding the exercise of
their powers and functions.
Question 6
(a) Naveen owns a house at Indore. Its municipal valuation is Rs.24,000. He
incurred the following expenses in respect of the house property :
Municipal tax @ 20%, fire insurance premium Rs.2,000 and land revenue
Rs.2,400. He took a loan of Rs.25,000 @16% per annum on 1st April, 2006.
55 EP-TL-June 2010
The whole amount is still unpaid. The house was completed on 1st April
2009. Find out the income from house property for the assessment year
2010-11 in respect of the following options :
(i) If the house is used by the assessee throughout the previous year for his
residential purpose; and
(ii) If the house is let-out for residential purposes on monthly rent of
Rs.2,000 from 1st April, 2009 to 31st January, 2010 and self-occupied for
the remaining period. (6 marks)
(b) What are the due dates of payment of advance tax in the case of corporate
and non-corporate assessees ? (3 marks)
(c) How is the liability to advance tax computed as per provisions of section
210? (3 marks)
(d) Explain the deductions which are available to an assessee under section 57
while computing taxable income chargeable under the head ‘income from
other sources’. (3 marks)
Answer 6(a)
Computation of Income from House Property
(a) If the house is used by the assessee throughout the previous
year for his residential purpose:
Rs.
Annual Value Nil
Less: Interest on Loan 6,400
As per point (ii) + (iii) below
Loss from House Property 6,400
OR
(B) If the house is let out for some period:
Annual Rental value of whole house : Rs.
Municipal Valuation 24,000
OR
Rent received for 10 months 2000 x 10 20,000 24,000
Less : Municipal Tax 20% 4,800
Net Annual Value 19,200
Less: Deduction under section 24
(i) SD 30% of NAV 19,200 x 30% = 5,760
(ii) Interest on Loan (2008-09) = 4,000
(iii) 1/5 of Interest on Loan (3 years)
Construction period :
25,000 x 16% x 3 x 1/5 = 2,400 12,160
Income from HP 7,040
EP-TL-June 2010 56
Answer 6(b)
Due date and instalments (Section 211):
(i) In case of companies:
Due Date Amount Payable
On or before 15th June Not less than 15% of Advance Tax liability
On or before15thSeptember Not less than 45% of Advance Tax liability reduced
by the amount already paid
On or before 15th December Not less than 75% of Advance Tax liability reduced
On or before 15th March Not less than 100% of Advance Tax liability
reduced by the amount already paid
(ii) In case of other assessees:

Due Date Amount Payable
On or before 15th September Not less than 30% of Advance Tax liability
On or before 15th December Not less than 60% of Advance Tax liability reduced
On or before 15th March 100% of Advance Tax liability reduced by the
amount already paid.
Answer 6(c)
Liability for payment of Advance Tax:
Advance tax shall be payable during a financial year in every case where the tax
payable by the assessee during the year is Rs.10,000 or more. As per provisions
under section 210, an assessee who is liable to pay advance tax is required to
estimate his current income and pay advance tax thereon without having to submit
any estimate or statement of income to the assessing authorities. After making
payment of first/second installment of advance tax, an assessee can revise the
remaining instalments of advance tax in accordance with his revised estimate of
advance tax. Tax can be computed on the current income as estimated by the
taxpayer at the rates in force during the financial year. From out of the amount of tax
so computed tax deductible or collectible at source will be deducted.
As regards computation of tax by Assessing Officer, first of all he will have to find
out income of the current year on the following basis:
(i) Total income of the latest previous year in respect of which the assessee has
been assessed by way of regular assessment; or
(ii) The total income computed by the assessee in the return for any subsequent
year; which is higher
Tax liability on the income of the current year would be calculated according to
the rate applicable TDS/TCS will be deducted. Calculation can be made on the
57 EP-TL-June 2010
similar lines when the assessee wants to make upward/downward revision of current
income.
As regards payment of advance tax in pursuance of revised order of Assessing
Officer, the total income declared in the return furnished by the assessee for the later
previous year or total income in respect of which the regular assessment is made
after passing an order by the Assessing Officer but before March 1, shall be taken
and income-tax thereon shall be calculated at the rates in force in the financial year.
From the tax so determined, TDS or TCS will be deducted.
Answer 6(d)
The income chargeable to tax under the head ‘income from other sources’ is
computed after making the following deductions available under section 57:
(i) In the case of dividend or interest on securities :
(a) Any reasonable sum paid by way of commission or remuneration to a
banker or any other person for the purpose of realizing dividend or
interest on securities on behalf of the assessee. Dividend under section
115-O is not chargeable to tax in the hands of shareholders.
(b) Any other expenses expended wholly and exclusively for the purpose of
earning such income during the previous year. However, the expenditure
must not be in the nature of capital expenditure and personal
expenditure.
(ii) In respect of employee’s contribution towards staff welfare schemes—
Deduction in respect of any sum received by a taxpayer as contribution from
his employees towards any welfare fund of such employees is allowable only
if such sum is credited by the taxpayer to the account of the employee in the
relevant fund before the due date. Due date is the date by which the
assessee is required, as employer, to credit such contribution to the account
of the employee in the relevant fund under the provisions of any law or terms
of contract of service or otherwise.
(iii) In respect of plant, machinery furniture and building which are let out :
(a) current repairs in respect of building;
(b) insurance premium in respect of insurance against risk of damage or
destruction of premises;
(c) repairs and insurance of machinery plant or furniture; and
(d) depreciation
(vi) In respect of family pension, the amount deductible is Rs.15,000 or one-third
of such income, whichever is less.
PART—B
Question 7
Attempt any four of the following :
(a) As per rule 2(1)(d) of the Service Tax Rules, 1994, who is the person
EP-TL-June 2010 58
specified to be liable for paying service tax in respect of the following

services —
(i) Telecommunication services.
(ii) Services in relation to general insurance business.
(iii) Services in relation to any taxable service or service to be provided by
any person from a foreign country to any person in India.
(iv) Business auxiliary service of distribution of mutual fund by a mutual fund
distributor or an agent, as the case may be.
(v) Sponsorship services provided to any body corporate or firm located in
India. (1 mark each)
(b) (i) Which category of persons must mandatorily obtain registration under
Chapter V of the Finance Act, 1994 ? (3 marks)
(ii) What are the time limits for making application for registration and
granting registration for service tax under Chapter V of the Finance Act,
1994 ? (2 marks)
(c) (i) When is an assessee registered under service tax required to surrender
the registration certificate ?
(ii) On which amount — amount of bill raised on the client or amount actually
received from the client, service tax is payable ?
(iii) If an assessee pays service tax on the billed amount but he gets less
amount from his customers, can he get refund from the government ?
(iv) If the service provider fails to recover service tax on a bill of Rs.12,000
where service tax is not shown separately in the invoice, what will be the
amount of service tax ?
(v) When will the small service provider claiming exemption from paying
service tax apply for registration under service tax ? (1 mark each)
(d) Comment on the following statements —
(i) “Service tax is payable as soon as advance is received even if the
service is provided later.” (2 marks)
(ii) “Excess service tax collected is to be paid to the Central Government.” (3
marks)
(e) Discuss the exemption available to small service providers from paying
service tax. (5 marks)
Answer 7(a)
(i) The Director General of Post and Telegraph, Chairman cum managing
director of MTNL, any person who has been granted a license by the
Government under Indian Telegraph Act.
(ii) Insurer or reinsurer providing such service.
(iii) Recipient of such service
59 EP-TL-June 2010
(iv) Mutual fund or asset Management Company, as the case may be, receiving
such service.
(v) Person providing such sponsorship services.
Answer 7(b)(i)
The following categories of persons must mandatorily obtain registration:
(a) Every person liable to pay service tax;
(b) An input service distributor;
(c) Every provider of taxable service whose aggregate value of taxable service in
a financial year exceeds Rs.9 lac.
Answer 7(b)(ii)
The time limit for making application for registration under the Service Tax in
respect of different categories of persons is as follows:
(a) For persons who are liable to pay services tax—As per Rule 4(1), the
application for registration is required to be made within 30 days from the
date of the commencement of business.
(b) For input service distributors—an input service distributor must make the
application in Form No. ST—1 within a period of 30 days of the
commencement of business.
(c) For small service providers—the small service providers must make the
application in Form No.ST-1 within a period of 30 days of the date in the
financial year on which the aggregate value of taxable services has
exceeded Rs.9 lac.
Time limit for granting registration –The department is required to issue the
registration certificate within 7 days from the receipt of the application. In case of
failure to issue registration certificate within 7 days, the registration applied for is
deemed to have been granted and the assessee can carry on with his activities. Of
course, the service provider is required to mention his registration number in his
service.
Answer 7(c)
(i) A registered assessee as per Rule 4(7) is required to surrender the
registration certificate when he ceases to provide the taxable service in
respect of which registration has been obtained, to the designated Central
Excise Officer/Superintendent of Central Excise.
(ii) Service tax is payable to the Government on the amount actually received
towards value of taxable services and not on amount charged in the
bills/invoice.
(iii) If the assesee pays service tax on the billed amount while he gets less
amount from his customers, he is entitled to a refund. In such a case, the
service provider should amend the bill by rectifying the bill or by issuing a
revised bill by endorsing the changes in the amount of the bill.
EP-TL-June 2010 60
(iv) The amount of the service tax would be :

(Gross amount x Rate of Tax)/100 + Rate of Tax
(12,000 x 10.3)/110.3 = Rs.1121
(v) The small service providers must make the application in Form No.ST-1
within a period of 30 days of the date in the financial year on which the
aggregate value of taxable services has exceeded Rs.9 lac.
Answer 7(d)(i)
As per Section 67(3), gross amount charged for taxable service shall include
payment for services received before, during or after the provision of taxable service.
Therefore, service tax is payable as soon as advance is received even if the service
is provided later.
Answer 7(d)(ii)
As per Section 73A(1), if any person who is liable to pay service tax has collected
any amount in excess of the service tax assessed or determined and paid on any
taxable service, from the service receiver in any manner as representing service tax,
he shall pay the amount so collected to the credit of the Central Government. Also, if
any person has collected any amount of service tax from any person which is not
required to be collected, such person shall also pay the amount so collected to the
credit of the Central Government. The Central Excise Officer is responsible for
collecting such amount by serving notice on the person in question.
Answer 7(e)
Service tax is a tax imposed by the Central Government on taxable services.
Taxable services means which is included in the list of taxable services under Section
65. But in the Act small services providers are exempted from paying service tax.
100% exemption from service tax has been granted to a provider of taxable service
when aggregate value of taxable service rendered by him from one or more
premises, does not exceed Rs.10 lakhs in the preceding Financial Year 2009-10.
In the Union Budget 2008 the exemption limit increased from 8 to 9 lakh.
Therefore, w.e.f. 1.4.2008 such service providers whose annual taxable service is not
more than Rs.10 lakh shall not be covered under service tax i.e., they shall not pay
service tax on services provided by them.
PART—C
Question 8
Attempt any four of the following :
(i) “As a result of introduction of value added tax (VAT), the central sales tax will
be phased out.” Explain the statement.
(ii) Discuss in what respects VAT system as adopted in India is deficient in the
direction of getting maximum benefits of VAT.
(iii) “VAT liability of a dealer is calculated by deducting input tax credit from tax
collected on sales during the payment period.” Discuss with the help of a
61 EP-TL-June 2010
suitable illustration.
(iv) Discuss the cases of purchases in respect of which generally no input tax
credit is available.
(v) Explain the various methods of computation of VAT liability. (5 marks each)
Answer 8(i)
As a result of introduction of VAT the CST is to be phased out. The provisions
regarding Central Sales Tax are summarized as below :
(a) Present CST will continue for some time. CST may go after decision in
respect of loss of revenue to states is taken and comprehensive taxation
information system is put in place.
(b) As a result of introduction of VAT CST has been reduced to 3% w.e.f.
1.4.2007. Further from 1.06.2008 the CST rate reduced to 2%.
(c) There will be no credit of CST paid on inter-state purchases.
(d) If goods are sent on stock transfer outside the state input tax paid in excess
of 2% will be allowed as credit. In other words input tax credit to the extent of
2% will not be allowed as credit if goods are sent inter-state.
Answer 8(ii)
The system of VAT as adopted by states in India though possesses several
advantages but still it is deficient on several counts as given below:
(i) The general rate of VAT is too high. The general rate of VAT is 12.5% which
is very high. This high rate has been fixed to compensate for revenue loss on
a large number of commodities and industrial inputs which have been
included in 4% rate category and many commodities are covered under the
‘exempt’ category.
(ii) Non-inclusion of services—A serious short-coming of the VAT system is the
non-inclusion of services up till now though the Central Government may
delegate the powers to tax some services to the states.
(iii) Exemptions—under continuous pressure from various quarters the number of
commodities exempted from VAT is still large.
(iv) Floor Rate – The states in India have two basic rates; general rate of 12.5%
and a reduced rate of 4%; for precious metals including gold and silver the
rate is 1%. These are supposed to be applied uniformly in all states and so
these rates are described as floor rates but the states have no power to fix
higher or lower rates than these rates. So, this acts as a contradiction in
terms in which floor rate is meant. Also, no rebate is given for taxes paid on
purchases of goods belonging to the exempted category.
(v) Classification of goods –classification of goods under different lists is in many
cases, arbitrary and leaves wide room for doubts and disputes as to whether
a particular item comes within the lower rate category or not. This is bound to
give rise to distortions and inequities in the application of the Tax.
(vi) Concessional rate for inputs—In no country in general, there is concessional
EP-TL-June 2010 62
rate for inputs as in India. This goes against the basic idea behind VAT that
the end use of a product by the customer should not affect the VAT to be
charged and paid by a seller, the system of ‘set-off’ takes care in the event
when it is used as business input. Also reduced rate of tax on inputs also
increases revenue loss from undeclared rates of finished products.
(vii) The application of VAT on maximum retail price at first point is a
misconceived idea as is being implemented in the case of drugs in West
Bengal and Maharashtra. It defeats the purpose of VAT which is to tax sales
at all stages with credits for input/purchase taxes so that there is an audit trail
at each stage. It also results in diverting investment from the consuming
states to the producing states where the first-point sellers are located.
Answer 8(iii)
The essence of VAT lies in providing set-off for the tax paid earlier through the
concept of input tax credit/rebate. This concept means setting off the amount of input
tax by a registered dealer against the amount of his output tax. The VAT is based on
the value addition to the goods, and the related VAT liability of the dealer is
calculated by deducting input tax credit from tax collected on sales during the
payment period.
Supposing Mr. X purchases raw materials worth Rs.10,00,000 and records sales
in the month of January 2009 of Rs.15,00,000. The rate of input tax is 4% and rate of
output tax is 12.5%. The computation of input tax credit shall be calculated as follows:
Rs.
Input purchased in January, 2008 10,00,000
Value of Output sold in January 15,00,000
Input tax paid @ 4% on Rs.10 lac 40,000
Output tax collected during January @ 12.5% on Rs.15 lac 1,87,500
VAT payable for January 2009 after input tax credit
[Rs.1,87,500 – Rs.40,000] 1,47,500
Answer 8(iv)
Generally, no credit is available in respect of the following purchases:
(i) Goods purchased from unregistered dealers;
(ii) Goods purchased from other States/Countries;
(iii) Purchase of Goods which are used in manufacture of exempted goods.
(iv) Purchase of Capital Goods.
(v) Purchase of Goods used as fuel in power generation.
(vi) Purchase of Goods to be dispatched as branch transfers outside states.
(vii) Purchase of Goods used in manufacture of goods to be dispatched outside
any state as branch transfer/consignments;
(viii) Purchase of Goods in cases where the dealer does not have invoices
showing amounts of tax charged separately by the selling dealer.
63 EP-TL-June 2010
(ix) Purchase of non-creditable goods.

(x) Purchase from a dealer who has opted for composition scheme.
Answer 8(v)
There are three different methods of computation of VAT. These are:
(a) Addition method: Under this method identification of Value Added is
estimated by adding values of all the elements of production, wages, profits
rent and interest. Under this method the incidence of tax evasion is greater
because it does not require matching of invoices.
(b) Subtraction method: In this method value addition is computed by means of
difference between output and input. This method is also known as the
product approach and has further variants, i.e., Direct Subtraction,
Intermediate Subtraction and Indirect Subtraction method.
(c) Tax Credit method: Under this method VAT payable by a dealer is arrived at
by deducting tax on inputs from the tax on sales. This method is known as
the invoice method. This method is universally used because of advantages
of computing tax liability under this method. As rate of tax is different in
respect of inputs and outputs the addition method and the subtraction
method are not practicable in case of a manufacturer.
1 EP–CL– December 2010
EXECUTIVE PROGRAMME
DECEMBER 2010
COMPANY LAW
NOTE : 1. Answer SIX questions including Question No. 1 which is COMPULSORY.
2. All references to sections relate to the Companies Act, 1956 unless stated
otherwise.
Question 1
Comment on any four of the following :
(i) It is not necessary to have the minutes of the meeting confirmed in the next
; meeting.
(ii) Postal ballot mechanism improves shareholders’ participation in corporate
decision-making.
(iii) Redeemable preference shares are not preference shares.
(iv) Directors ought not misuse the trust entrusted on them.
(v) The terms ‘winding-up’ and ‘dissolution’ are not one and the same thing.
(5 marks each)
Answer 1(i)
Section 193 of the Companies Act, 1956 provides that -
Each page of every minute book shall be initialed or signed and the last page of the
record of proceedings of each meeting in such books shall be dated and signed -
(a) in the case of minutes of proceedings of a meeting of the Board or of a committee

thereof, by the chairman of the said meeting or the chairman of the next
succeeding meeting ;
(b) in the case of minutes of proceedings of a general meeting, by the chairman of

the same meeting within the aforesaid period of thirty days or in the event of the
death or inability of that chairman within that period, by a director duly authorized
by the Board for the purpose.
It was held in the case of [Chetkar Jha & Viswanath Prasad Verma and Ors. (1971
(1) SCR 586)] that when the minutes of a meeting are placed before the next meeting,
the only thing that can be done is to see whether the decision taken at the earlier
meeting has been properly recorded or not. The accuracy of the minutes and not the
validity of the decision are considered at the meeting. Once a decision is duly taken, it
can only be changed by a substantive resolution properly adopted for such a change.
Therefore, in view of the above, it is not necessary to have the minutes of the
meeting confirmed in the next meeting.
EP–CL– December 2010 2
Answer 1(ii)
Section 192A of the Companies Act, 1956 contains provisions regarding passing of
resolution by postal ballot. Postal ballot mechanism improves shareholders’ participation
in corporate decision-making. It enables members to exercise their voting right sitting at
home through postal ballot which they might not have otherwise done because of their
inability to attend meetings or to appoint proxies.
Members of a listed company are widely dispersed and there is very poor attendance
at general meetings. The meetings are normally attended by promoters, their friends
and associates who collect proxies and by and large, resolutions are passed unanimously
and without any dissent. Most of the public shareholders are only interested in capital
appreciation of their shares and are not interested in attending general meetings. Further,
general meetings are required to be held during working hours and shareholders find it
difficult to attend meetings.
In view of the provisions made in this section, it would now be possible for all the
shareholders of a listed company to exercise their right to vote in case of important
resolutions.
Answer 1(iii)
Section 85(1) of the Companies Act, 1956 defines a preference share as that part of
share capital which fulfils both the following requirements:
(i) it carries a preferential right of fixed rate of dividend,
(ii) it carries a preferential right to be repaid the amount of the capital paid-up or
deemed to have been paid-up in winding up or repayment of capital.
A redeemable preference share is a preference share which a company reserved
the right to redeem, either out of profits or out of the proceeds of a further issue of
shares. It may or may not have a fixed redemption date. The rights of preference
shareholders are set out in the memorandum or articles.
Therefore, in view of the above, redeemable preference shares are preference shares.
Answer 1(iv)
Directors of the company are to some extent, trustees for the properties of the
company and of the rights which are conferred on them by law and conventions. “A
trustee is a person who is the owner of the property, deals with it as principal, as owner
and a master, subject only to an equitable obligation to account to some person to
whom he stands in relation of trustee” [Smith v. Anderson (1880) 15 Ch. D. 247].
Directors stand in fiduciary position towards the company in regard to the powers conferred
on them by the Companies Act and by the articles of the company and also with regard
to the funds of the company, which are under their control.
Therefore, the directors ought not to misuse the trust entrusted on them.
Answer 1(v)
The terms ‘winding up’ and ‘dissolution’ are not one and the same thing. The main
points of differences between them are given below:
1. The entire procedure for bringing about a lawful end to the life of a company is
divided into two stages – ‘winding up’ and ‘dissolution’. Winding up is the first
stage in the process whereby assets are realised, liabilities are paid off and the
surplus, if any, distributed among its members. Dissolution is the final stage
whereby the existence of the company is withdrawn by the law.
2. The liquidator appointed by the company or the Court carries out the winding up
proceedings but the order for dissolution can be passed by the Court only.
3. According to the Companies Act the liquidator can represent the company in
the process of winding up. This can be done till the order of dissolution is
passed by the Court. Once the Court passes dissolution orders the liquidator
can no longer represent the company.
4. Creditors can prove their debts in the winding up but not on the dissolution of the
company.
5. Winding up in all cases does not culminate in dissolution. Even after paying all
the creditors there may still be a surplus; company may earn profits during the
course of beneficial winding up; there may be a scheme of compromise with
creditors while company is in winding up and in all such events the company
may in all probability come out of winding up and hand over back to shareholders/
old management. Dissolution is an act which puts an end to the life of the
company.
Question 2
(a) Choose the most appropriate answer from the given options in respect of the
following :
(i) The amount of dividend declared will have to be deposited in a separate
bank account within —
(a) 5 Days from the date of declaration of dividend
(b) 7 Days from the date of declaration of dividend
(c) 15 Days from the date of declaration of dividend
(d) 21 Days from the date of declaration of dividend.
(ii) No person can hold office of a director in more than —
(a) 10 Public companies at a time
(b) 15 Public companies at a time
(c) 20 Public companies at a time
(d) 50 Public companies at a time.
(iii) DIN will be allotted by the Central Government within —
(a) 1 Month from the receipt of application for the same
(b) 3 Months from the receipt of application for the same
(c) 6 Months from the receipt of application for the same
(d) 12 Months from the receipt of application for the same.
(iv) After completion of buy-back operation, the securities must be extinguished
and physically destroyed within —
(a) 30 Days
(b) 15 Days
(c) 7 Days
(d) 21 Days.
(v) Under Section 224(1), an auditor is appointed for a particular period —
(a) From the date of appointment till another auditor is appointed
(b) From the conclusion of one AGM until the conclusion of next AGM
(c) From the date of appointment till the auditor resigns
(vi) Under Section 75, whenever a company having a share capital makes any
allotment of shares, it must file a return of allotment with the Registrar of
Companies within —
(a) 7 Days
(b) 15 Days
(c) 30 Days
(d) 60 Days.
(vii) Certified copy of the special resolutions passed in the meeting will have to
be filed with the Registrar of Companies within —
(a) 30 Days
(b) 60 Days
(c) 15 Days
(d) 7 Days.
(viii) Section 149(1) provides that in case of a public company, borrowing powers
are not exercisable until the company is entitled to —
(a) Commence business
(b) Incorporate business
(c) Start business
(d) None of the above. (1 mark each)
(b) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s) :
(i) Small deposit holders are those who have deposited in a financial year a
sum not exceeding Rs. __________ in a public company.
(ii) If the proposed dividend exceeds 15% but does not exceed 20% of the
paid-up capital, the amount to be transferred to reserves will not be less
than __________ % of the current profit.
(iii) Resignation of a director is effective from the date it was ___________.
(iv) Under section 285, there should be at least ____________ meetings of the
Board of directors in a year.
(v) An audit firm having 3 partners not in full time employment anywhere may*
be appointed as auditor in maximum _________ public companies.
(vi) Section 260 provides for the appointment of _____________.
(vii) A director of 10 companies will require ___________ number(s) of DIN.
(viii) In terms of Section 383A, it is necessary to appoint a Whole-time Secretary
in a company having a paid-up capital of Rs.____________. (1 mark each)
Answer 2(a)
(i) (a) 5 days from the date of declaration of dividend.
(ii) (b) 15 Public companies at a time.
(iii) (a) 1 month from the receipt of application for the same.
(iv) (c) 7days
(v) (b) From the conclusion of one AGM until the conclusion of next AGM
(vi) (c) 30 days
(vii) (a) 30 days
(viii) (a) Commence business
Answer 2(b)
(i) Small deposit holders are those who have deposited in a financial year a sum
not exceeding Rs. 20,000 in a public company.
(ii) If the proposed dividend exceeds 15% but does not exceed 20% of the paid-up
capital, the amount to be transferred to reserves will not be less than 7.5% of
the current profit.
(iii) Resignation of a director is effective from the date it was tendered .
(iv) Under Section 285, there should be at least four meetings of the Board of
directors in a year.
(v) An audit firm having 3 partners not in full time employment anywhere may* be
appointed as auditor in maximum 60 public companies.
(vi) Section 260 provides for the appointment of additional directors .
(vii) A director of 10 companies will require one number(s) of DIN.
(viii) In terms of Section 383A, it is necessary to appoint a Whole-time Secretary in
a company having a paid-up capital of Rs. 5 crore or more .
Question 3
(a) Explain when a person ceases to be a member of the company. (8 marks)
(b) Enumerate the disqualifications of a director mentioned in Section 274.
(8 marks)
Answer 3(a)
A person ceases to be a member of a company when his name is removed from its
register of members, which may occur in any of the following situations:
(a) he transfers his shares to another person, the transfer is registered by the
company and his name is removed from the register of members;
(b) his shares are forfeited;
(c) his shares are sold by the company to enforce a lien;
(d) he dies; (his estate, however, remains liable for calls);
(e) he is adjudged insolvent and the Official Assignee disclaims his shares;
(f) his redeemable preference shares are redeemed;
(g) he rescinds the contract of membership on the ground of fraud or

misrepresentation or a genuine mistake;
(h) his shares are purchased either by another member or by the company itself
under an order of the Court under Section 402 of the Companies Act;
(i) the member is a company which is being wound-up in India, and the liquidator
disclaims the shares;
(j) the company is wound up.

Though one ceases to be a member, he remains liable as a contributory and is also
entitled to share in the surplus, if any.
Answer 3(b)
The Companies Act, 1956 does not lay down any qualifications for a person to be
appointed as a director of a company. However, it mentions disqualifications of directors,
which are contained in Section 274 of the Act.
Section 274 lays down: “
(1) A person shall not be capable of being appointed director of a company, if—
(a) he has been found to be of unsound mind by a Court of competent jurisdiction
and the finding is in force;
(b) he is an un-discharged insolvent;
(c) he has applied to be adjudicated as an insolvent and his application is
pending;
(d) he has been convicted by a Court of any offence involving moral turpitude
and sentenced in respect thereof to imprisonment for not less than six
months, and a period of five years has not elapsed from the date of expiry
of the sentence;
(e) he has not paid any call in respect of the shares of the company held by
him, whether alone or jointly with others, and six months have elapsed from
the last day fixed for the payment of the call;
(f) an order disqualifying him for appointment as director has been passed by
Court in pursuance of Section 203 and is in force unless the leave of the
Court has been obtained for his appointment in pursuance of that section;
or
(g) such person is already a director of a public company which, -
(a) has not filed the annual accounts and annual returns for any continuous
three financial years commencing on and after first day of April 1999; or
(b) has failed to repay its deposit or interest thereon on due date or redeem
its debentures on due date or pay dividend and such failure continues
for one year or more:
Provided that such person shall not be eligible to be appointed as a director of
any other public company for a period of five years from the date on which such
public company, in which he is a director, failed to file annual accounts and
annual returns under sub-clause (a) or has failed to repay its deposit or interest
or redeem its debentures on due date or pay dividend referred to in sub-clause
(b).
(2) the Central Government may, by notification in the Official Gazette, remove—
(a) the disqualification incurred by any person in virtue of clause (d) of Sub-
section (1), either generally or in relation to any company or companies
specified in the notification; or
(b) the disqualification incurred by any person in virtue of clause (e) of Sub-
section (1)
(3) A private company which is not a subsidiary of a public company may, by its
articles, provide that a person shall be disqualified for appointment as a director
on any grounds in addition to those specified in Sub-section (1)”
Question 4
Write notes on any four of the following :
(i) Liability clause in memorandum of association
(ii) Cases in which prospectus is not required to be issued
(iii) Investor education and protection fund
(iv) Procedure for striking off the name of a company
(v) Digital signature certificate. (4 marks each)
Answer 4(i)
Liability clause in memorandum of association
The fourth compulsory clause of memorandum of association must state that liability
of the members is limited, if it is so intended that the company be limited by shares or
by guarantee. The effect of this clause is that in a company limited by shares, no
member can be called upon to pay more than what remains unpaid. For example, where
a shareholder holding a share of Rs.100 has paid Rs.75 on it, he can be called upon to
pay the balance of Rs.25. In case, he has paid the full value of Rs.100, he will not be
required to pay anything more even if the company owes huge debts to its creditors.
In a company limited by guarantee, the liability clause will state the amount which
each member should undertake to contribute to the assets of the company in the event
of liquidation of the company. He cannot be called upon to pay any thing before the
company goes into liquidation.
Answer 4(ii)
Cases in which prospectus is not required to be issued
In the following cases although the shares are offered and application forms issued,
a prospectus containing all the details required under Section 56 is not necessary:
(i) Where a person is a bona fide invitee to enter into an underwriting agreement
with regard to shares or debentures; [Section 56(3)].
(ii) where the shares or debentures are not offered to public; [Section 56(3)].
(iii) where the issue relates to shares or debentures uniform in all respects, with the
shares or debentures already issued and dealt in or quoted at a recognised
stock exchange; [Section 56(5)].
(iv) where the shares or debentures are offered to the existing holders of shares or
debentures respectively; [Section 56(5)].
(v) where any prospectus is published as a newspaper advertisement ordinarily
called prospectus announcement, it shall not be necessary to specify the
contents of the memorandum, or the names etc. of the signatories to the
memorandum, or the number of shares subscribed for by them (Section 66).
However, the guidelines issued by SEBI as to the code of advertisement must
be adhered to.
Answer 4(iii)
Investor education and protection fund
As per Section 205C of the Companies Act, 1956, the Central Government shall
establish a fund to be called the Investor Education and Protection Fund (hereafter
referred to as the “Fund”).
There shall be credited to the Fund the following amounts, namely:
(a) amounts in the unpaid dividend accounts of companies;
(b) the application moneys received by companies for allotment of any securities
and due for refund;
(c) matured deposits with companies;
(d) matured debentures with companies;
(e) the interest accrued on the account referred to in clauses (a) to (d);
(f) grants and donations given to the Fund by the Central Government, State
Government, companies or any other institutions for the purposes of the Fund;
and
(g) the interest or other income received out of the investments made from the
Fund.
However, no such amounts as mentioned in (a) to (d) above shall form part of the
fund unless such amounts have remained unclaimed and unpaid for a period of seven
years from the date they became due for payment.
Answer 4(iv)
Procedure for striking off the name of a company
The striking off a company may be effected by following two ways:
(A) Striking-off by Registrar of his own motiion
Where the Registrar has reasonable cause to believe that a company is not
carrying on business or in operation, he shall send to the company by post a
letter inquiring whether the company is carrying on business or in operation. If
the company does not reciprocate, the Registrar may proceed in this regard to
strike the company off the register of companies and publish a notice in this
regard in the Official Gazette.
(B) Striking-off on company’s application
The Registrar can exercise the power conferred on him under Section 560 of the
Companies Act, 1956 when an application is received by him from the company
for striking it off on the ground that it is a defunct company, i.e. it is not carrying
on business or in operation. After the receipt of application from the company,
the Registrar may proceed to strike its name off the register, and shall publish
notice thereof in the Official Gazette.
Answer 4(v)
Digital signature certificate
Digital Signature Certificates (DSC) are the digital equivalent (that is electronic format)
of physical or paper certificates. Examples of physical certificates are drivers’ licenses,
passports or membership cards. Certificates serve as proof of identity of an individual
for a certain purpose; for example, a driver’s license identifies someone who can legally
drive in a particular country. Likewise, a digital certificate can be presented electronically
to prove one’s identity, to access information or services on the Internet or to sign
certain documents digitally.
Under the MCA 21 system, the following four types of users are identified as users
of Digital Signatures and are required to obtain digital signature certificate:
1. MCA (Government) Employees.
2. Professionals, (company secretaries, Chartered Accountants, Cost Accountants
and Lawyers) who interact with MCA and companies in the context of Companies
Act.
3. Authorised signatories of the company including managing director, directors,
manager or secretary.
4. Representatives of Banks and Financial institutions.
A person requiring a Digital signature certificate can approach any of the certifying
authorities identified by the MCA for issuance of Digital signature certificate.
Question 5
(a) What are the consequences of non-registration of a charge which requires
registration under Section 125 ? (5 marks)
(b) “The power to borrow includes the power to give security.” Comment. ‘
(5 marks)
(c) What are the rights, powers and disabilities of debenture trustees ?
(6 marks)
Answer 5(a)
If a charge which requires registration under Section 125 of the Companies Act,
1956 is not registered as per Sub-section (1) of Section 125, the consequences are as
follows:
(a) The charge will be void as against the liquidator (if the company goes into
liquidation) and against creditors, but against them only.
(b) The charge is good against the company and the amount becomes payable
immediately.
(c) Until liquidation, the person seeking to enforce such a charge, has available to
him all remedies of a mortgage against the company, though not against other
creditors.
(d) The company may give a subsequent valid mortgage to secure the same debt.
But if a subsequent creditor, even with notice of the first charge, takes a registered
charge before the first said charge is registered, he obtains priority.
(e) During liquidation the charge-holder (creditor) assumes the status of an unsecured
creditor, as the charge is void against liquidator and creditors.
(f) The holder of an equitable charge whose charge is void on the ground of non-
registration, has no lien on the title deeds or documents deposited with him as
the deposit is only ancillary to the void charge.
(g) Although a security becomes void by non-registration, it does not affect the
contract or obligation of the company to repay the money thereby secured. In
fact, Section 125 provides that where a charge becomes void by non-registration,
the money becomes immediately payable and the company cannot repudiate it
on the ground of non-registration.
(h) Omission to register particulars of charges as required is punishable with fine.
The company and every officer of the company or other person who is in default
shall be punishable with fine which may extend to five thousand rupees for
everyday during which the default continues. A further fine of
Rs. 10,000 may be imposed on the company and every officer of the company
for other defaults relating to the registration of charges (Section 142).
Answer 5(b)
The power to borrow money, whether express or implied, includes the power to
charge the assets of the Company as security to the lender. A company, like an individual,
may have to borrow for the exigencies of its business. The power of a company to
borrow money is implied in the case of all trading companies. [General Auction Estate
Co. v. Swith (1891) Ch 432]. Non-trading companies, however, must be expressly
authorised to borrow by their memorandum.
In practice, all types of companies, trading and non-trading, are given express power
to borrow by their articles which can fix up the maximum amount which can be borrowed
and give security. A power to borrow money, whether express or implied, includes the
power to charge the assets of the company as security to the lender.
A company, like a natural person, can give security. Normally, the debentures and
other borrowings of the company are secured by a charge on the assets of the company.
Where property, both existing and future, is agreed to be made available as a security
for the repayment of debt and creditors have a present right to have it made available,
there is a charge.
Answer 5(c)
The rights, powers and disabilities of debenture trustees are discussed as below:
Rights of debenture trustee
1. The right to have the possession of the instrument of trust and the title deed
relating to trust property.
2. The right to be reimbursed of all costs expenses and liabilities incurred in
administration of the trust.
3. When a trustee properly completes his duties is entitled to get a discharge to
the effect in writing.
4. A trustee has a general right to do all necessary acts (i) for preservation and
protection of the trust property and (ii) to protect the interest of a beneficiary
who is not competent to contract but he cannot give on lease any trust property
for more than twenty one years without the permission of a court.
Powers of debenture trustee
1. He can sell the trust property where instrument of the trust so empowers him.
2. A trustee has a power to vary investments.
3. A trustee has a power to apply the trust property for maintenance of property as
provided in the instrument of trust.
4. In case of death of one of the trustees the other trustees have a right to act
unless contrary intention appears from the instrument of trust.
Disabilities of debenture trustees
1. A trustee who once accepted the trust cannot renounce it except –
(i) with the permission of the court
(ii) with the consent of the beneficiaries who are competent to contract
(iii) by virtue of a special power in the instrument of the trust.
2. A trustee cannot delegate his office or any of his duties either to a co-trustee or
to a stranger except in the following cases-
(i) when the instrument of the trust so provides
(ii) when such a delegation is in the regular course of business
(iii) when such a delegation is necessary, and
(iv) the beneficiary being competent to contract consents to such a delegation.
3. The trustees cannot exercise their discretionary powers arbitrarily.
4. The trustee and the co-trustee may not lend the trust amount to themselves.
Question 6
(a) What are the important rules relating to forfeiture of shares ? (8 marks)
(b) What are the benefits of ‘depository system’ ? (8 marks)
Answer 6(a)
The following rules may be noted in connection with forfeiture of shares:
1. Articles to authorize for forfeiture of shares – The Companies Act, 1956 do not
contain any provision in regard to forfeiture of shares. However, if the articles
authorize, shares can be forfeited for non-payment of any call. A company may
also adopt Table A of Schedule I of the Companies Act, 1956. As per Regulation
29 of Table A, shares can be forfeited only against non-payment of any call, or
installments of a call. The articles of a company may, however, lawfully
incorporate any other grounds of forfeiture [Shah J. in Naresh Chandra Sanyal
v. Calcutta Stock Exchange Assn.Ltd. AIR 1971 SC 422].
2. Proper Notice – Before the shares of a member are forfeited, a proper notice to
that effect must have been served. Regulation 30 of Table A provides that a
notice requiring payment of the amount due together with any interest accrued
must mention a further day (not less than 14 days from the date of service of
the notice) on or before which the payment is to be made. The notice must also
mention that in the event of non-payment, the shares will be liable to be forfeited.
3. Resolution for forfeiture – Articles 31 of the Table A provides that if the defaulting
shareholder does not pay the amount within the specified time as required by
the notice, the directors may pass a resolution forfeiting the shares.
4. Power of forfeiture must be exercised bonafide and for the benefit of the company–
The power to forfeit must be exercised for the benefit of the company. The
power must be used to force reluctant shareholders to pay the unpaid call money.
The power of forfeiture cannot be exercised to relieve unwilling shareholders
from the liability of making the payment. Such a shareholder continues to be
responsible for the unpaid part of the shares.
5. Consequences of forfeiture of shares – As per Article 33 of Table A, person
whose shares have been forfeited shall cease to be a member in respect of the
forfeited shares. However, he shall remain liable to pay to the company all
moneys which, at the date of forfeiture, were presently payable by him to the
company in respect of the shares. The liability of such person shall cease if and
when the company shall have received payment in full of all such moneys in
respect of the shares.
Answer 6(b)
The benefits from the depository system are as follows :
(a) It reduces the cost of issue of securities by eliminating stamp duty.
(b) It reduces the scope for theft, forgery and damage to security certificates.
(c) It eliminates bad deliveries.
(d) It entitles the transferee to all the rights associated with the securities immediately
on settlement of purchase transaction.
(e) It enhances the velocity of the securities in circulation and hence liquidity in the
market. The investors can trade in securities immediately on allotment without
waiting for receipt of security certificates.
(f) It makes faster disbursement of non cash corporate benefits like bonus issue
possible.
(g) It eliminates problems relating to change of address of investor, transmission of
shares etc.
(h) It eliminates problems relating to selling securities on behalf of a minor.
Question 7
(a) Money Ltd. desires to reduce its paid-up capital by purchasing from some select
shareholders holding shares constituting 20% of its paid-up capital. Can it do
so? Discuss. (8 marks)
(b) Abhay Ltd. committed default by failing to file balance sheet and profit and loss
account. Proceedings have been initiated against a non-executive director.
However, he contended that he had resigned before the date of default. Whether
the contention of the ex-director can be taken into account ? Give reasons.
(4 marks)
(c) A demerger scheme was approved by the shareholders, secured and unsecured
creditors. The scheme was neither in violation of any law nor against public
interest. However, Accounting Standard-14 was not adopted. Whether the scheme
can be sanctioned ? Explain. (4 marks)
Answer 7(a)
Money Ltd. can reduce its paid-up capital by purchasing from some select
shareholders holding shares constituting 20% of its paid-up capital provided it complies
with the provisions of Section 77A of the Companies Act, 1956 which is briefly summarized
as below:-
(1) The buy-back is authorized by its articles.
(2) A special resolution has been passed in general meeting of the company
authorizing the buy-back.
(3) The buy-back is or less than twenty-five percent of the total paid-up capital and
free reserves of the company. However, the buy-back of equity shares in any
financial year shall not exceed twenty-five percent of its total paid-up equity
capital in that financial year.
(4) The ratio of the debt owed by the company is not more than twice the capital
and its free reserves after such buy-back. However, the Central Government
may prescribe a higher amount for certain class of companies.
(5) All the shares or other specified securities for buy-back are fully paid-up.
(6) Every buy-back shall be completed within twelve months from the date of passing
the special resolution or a resolution passed by the board under clause (b) of
Sub-section (2) of Section 77A.
Besides, fulfilling the above conditions, Money Ltd. cannot buy-back from some
select shareholders except as mentioned in Sub-section (5) of Section 77A of the
Companies Act, 1956 which is given as below :
(a) from the existing security holders on a proportionate basis; or
(b) from the open market; or
(c) from odd lots, that is to say, where the lot of securities of a public company
whose shares are listed on a recognized stock exchange, is smaller than such
marketable lot, as may be specified by the stock exchange; or
(d) by purchasing the securities issued to employees of the company pursuant to
a scheme of stock option or sweat equity.
Answer 7(b)
In the case of Jayesh R More v. State of Gujarat, (2000) CLC 200 (Guj) that where
the director in question had resigned before the default occurred. It was held that he
ceased to be a director and had no relationship with the company on the date of the
alleged commission of the offence. He did not fall in the definition of an officer in default.
The complaint against him was liable to be quashed.
Therefore, in view of the above, contention of the non–executive director that he had
resigned before the date of default can be taken into account.
Answer 7(c)
It was held by the Gujrat High Court in the case of Gallops Realty (P) Ltd., In re v.
K.A. Puj, J. (2010) that Accounting Standard – 14 is applicable only in case of
amalgamation and not in case of demerger. Further, the scheme was neither in violation
of any law nor against public interest and it was also approved by the shareholders,
secured and unsecured creditors.
Therefore, in view of the above, the scheme can be sanctioned.
Question 8
Distinguish between any four of the following :
(i) ‘Subsidiary company’ and ‘holding company’.
(ii) ‘Rights issue’ and ‘bonus issue’.
(iii) ‘Sweat equity’ and ‘employees’ stock purchase scheme’.
(iv) ‘Trust’ and ‘agency’.
(v) ‘Producer company’ and ‘limited liability partnership’.
Answer 8(i)
‘Subsidiary company’ and ‘holding company’
Section 4 of the Companies Act, 1956 gives the meaning of holding company and
subsidiary company. Accordingly, section 4 of the Act provides that –
A company shall be deemed to be a subsidiary of another (holding company) if, but
only if, —
(a) that other (holding company) controls the composition of its Board of directors;
or
(b) that other—
(i) where the first-mentioned company is an existing company in respect of
which the holders of preference shares issued before the commencement
of this Act have the same voting rights in all respects as the holders of
equity shares, exercises or controls more than half of the total voting power
of such company;
(ii) where the first-mentioned company is any other company, holds more than
half in nominal value of its equity share capital; or]
(c) the first-mentioned company is a subsidiary of any company which is that other’s
subsidiary.
Illustration
Company B is a subsidiary of company A, and company C is a subsidiary of company

B. Company C is a subsidiary of company A, by virtue of clause (c) above. If company
D is a subsidiary of company C, company D will be a subsidiary of company B and
consequently also of company A, by virtue of clause (c) above, and so on.
So, the difference between a holding company and a subsidiary company has been
made very clear by Section 4 of the Companies Act, 1956.
Answer 8(ii)
‘Rights issue’ and ‘bonus issue’
Rights Issue - Section 81 of the Companies Act, 1956 provides for the issue of right
share and states that whenever at any time after expiry of two years from the incorporation
of the company or after the expiry of one year from the first allotment of shares, whichever
is earlier, it is proposed to increase the subscribed capital by allotment of further shares,
such shares shall be offered to the existing holders of equity shares in proportion to the
capital paid up on their shares at the time of further issue.
Bonus Issue - A company may, if its Articles provide, capitalize its profits by issuing
fully-paid bonus shares. The issue of bonus shares by a company is a common feature.
When a company is prosperous and accumulates large distributable profits, it converts
these accumulated profits into capital and divides the capital among the existing members
in proportion to their entitlements. Members do not have to pay any amount for such
shares. They are given free.
So, while the purpose of right issue is to increase capital by inviting existing
shareholders to subscribe capital, bonus shares are issued to convert accumulated
profits into the share capital of the company.
Answer 8(iii)
‘Sweat equity’ and ‘employees’ stock purchase scheme’
Sweat equity shares means equity shares issued by a company to its employees or
directors at a discount or for consideration, other than cash for providing know-how or
making available right in the nature of intellectual property rights or value additions, by
whatever name called.
ESPS or employee stock purchase scheme means a scheme under which the
company offers shares to employees as part of a public issue or otherwise. Employees
who are promoters or belongs to a group of promoters shall not be eligible to participate
in ESPS. Issue of ESPS requires approval of the shareholders of the company by
passing special resolution in the general body meeting of the shareholders. ESPS will
have lock-in period of minimum one year.
So, sweat equity is issued to employees or directors in recognition of their contribution
for providing know how etc. There is no such consideration in case of ESPS. Lock-in-
period of one year is provided in case of ESPS whereas the same is 3 years in case of
sweat equity. Further, sweat equity shares can be issued to promoters whereas ESPS
cannot be issued to promoters.
Answer 8(iv)
‘Trust’ and ‘agency’
The term trust has been defined as (i) an obligation annexed to the ownership of
property and (ii) arising out of confidence reposed in and (iii) accepted by the owner or
declared accepted by him, (iv) for the benefit of another or of another and the owner.
An agent is an individual, firm or body corporate who has been appointed by an
agreement as an agent to do any act for another, or to represent another in dealing with
any third person. The relationship is to be determined not by name but by conduct of the
parties and the purpose of their dealings.
So, the fundamental differences between Trust and Agency are given below:
(i) An agent has no title to the property. A trustee is the full owner of the trust
property.
(ii) An agent acts on behalf of the principal. A trustee acts in his own right.
(iii) An agent is not personally liable, if he acts on behalf of the principle. On the
other hand, a trustee is personally liable.
Answer 8(v)
‘Producer company’ and ‘limited liability partnership’
The main differences between an LLP and a Producer Company are given as below–
LLP Producer Company
1. Membership Suitable for partnership These companies are formed by

concerns set up by the manufacturers, producers, etc.
professionals viz.
Chartered Accountants,
Company Secretaries
etc. Though anybody
can join an LLP.
2. No. of Two or more persons Any ten or more individual
Members carrying on a lawful producer or two or more producer
business. institutions or their combination.
3. Liability Limited to the Limited Limited to the amount of unpaid
Liability Agreement. share, held by them.
4. Directors Appointment of directors Minimum five and maximum
is not required. Organi- fifteen directors.
zation is run by the
designated partners /
partners.
5. Shares Capital contribution as The share capital of producer
given in the LLP agree- company is divided into equity
ment. shares only.
6. Conversion May convert to other No conversion clause exists.
forms of business.
7. Name The word ‘LLP’ would The word ‘Producer Company
form part of its name. Limited’ would form part of its
name.
ECONOMIC AND LABOUR LAWS
Time allowed: 3 hours Maximum marks: 100
PART—A
(Answer Question No.1 which is COMPULSORY and
ANY THREE of the rest from this part.)
Question 1
With reference to the relevant legal enactments, write short notes on any five of the
following:
(i)Privileges to a star export house
(ii)Competition advocacy
(iii)Term of patents
(iv)The concept of sustainable development
(v)Mens rea under the Essential Commodities Act, 1955
(vi)International copyright. (3 marks each)
Answer 1(i)
Privileges to a Star Export House
A Star Export House is eligible for the following privileges:
(i)Licence/certificate/permissions etc. and Customs clearances for both imports and
exports on self-declaration basis;
(ii)Fixation of Input-Output norms on priority within 60 days;
(iii)Exemption from compulsory negotiation of documents through banks. The
remittance, however, is required to be received through banking channels;
(iv)100% retention of foreign exchange in EEFC account;
(v)Enhancement in normal repatriation period from 180 days to 360 days;
(vi)Exemption from furnishing of Bank Guarantee in Schemes under the Foreign Trade
Policy.
(vii)Two star export houses and above have been permitted export warehouses as per
the Guidelines specified by Department of Revenue.
Answer 1(ii)
Competition Advocacy
Under Section 49 of the Competition Act, 2002 the Central Government/State Government
may seek the opinion of the Competition Commission of India on the possible effects of the
16 matter. In this context, Section 49 envisages that while
policy on Competition or any other
formulating a policy on competition, the Government may make a reference to the
Commission for its opinion on possible effect of such a policy on the competition or any other
matter.
On receipt of such a reference, the Commission shall give its opinion on it to the Central
Government /State Government within 60 days of making such reference and the latter may
formulate the policy as it deems fit. The role of the Commission is advisory and the opinion
given by the Commission is not binding upon the Central Government / State Government in
formulating such a policy. The Commission is also empowered to take suitable measures for
the (a) promotion of Competition advocacy; (b) creating awareness about the competition;
and (c) imparting training about Competition issues.
The creating awareness about benefits of competition and imparting training in
competition issues is expected to generate conducive environment to promote and foster
competition, which is sine-qua non for accelerating economic growth.
Answer 1(iii)
Term of Patents
Section 53 of the Patents Act, 1970 provides that the term of every patent granted after
the commencement of the Patents (Amendment) Act, 2002 and the term of every patent
which has not expired and has not ceased to have effect, on the date of such
commencement, shall be twenty years from the date of filing of application for the patent.
Explanation to Section 53(1) clarifies that the term of patent in case of international
applications filed under the Patent Cooperation Treaty (PCT) designating India, shall be
twenty years from the international filing date accorded under the Patent Cooperation Treaty.
A patent shall cease to have effect on the expiration of the period prescribed for the
payment of any renewal fee, if that fee is not paid within the prescribed period or within such
extended period as may be prescribed. Further on cessation of the patent right due to non-
payment of renewal fee or on expiry of the term of patent, the subject matter covered by the
said patent shall not be entitled to any protection.
Answer 1(iv)
Concept of Sustainable Development
Universe is one of the rarest gift that the nature has given to the human being. It is
essential for the people who live now to use the resources of earth sustainably and prudently
so that they do not deny certain benefits to future generations. Modern states used the
natural resources of the earth recklessly. This has resulted in a number of environmental
issues like climate change, global warming etc.. We should, therefore integrate conservation
and development, conservation to keep our actions within the earth’s capacity and
development to enable the people everywhere to enjoy long, healthy and fulfilling lives.
The concept of ‘sustainable development was first highlighted at the United Nations
Conference on the Human Environment held at Stockholm in June, 1972. Since then, various
countries have enacted legislative measures for protection of the environment introducing
strict penal measures for damages caused due to hazardous substances, etc.
Answer 1(v)
Mens rea under the Essential Commodities Act, 1955
In criminal law, mens rea – the Latin term for "guilty mind" – is usually one of the
necessary elements of a crime. The standard common law test of criminal liability is usually
expressed in the Latin phrase, actus non facit reum nisi mens sit rea, which means "the act
does not make a person guilty unless the mind be also guilty".
With respect to the Essential Commodities Act, 1955, it was observed by the Supreme
Court in Nathulal v. State of Madhya Pradesh (AIR 1966 S.C. 43) that mens rea or guilty mind
is an ingredient of the offence punishable under Section 7 of the Act i.e., an intentional
contravention of an order made under Section 3. In other words, if the dealer did believe
bona fide that he could store the foodgrains for instance, without infringing any order under
Section 3, there could be no contravention under Section 7.
In Hariprasad Rao v. State (AIR 1951 SC 264), it was observed that unless a Statute
either clearly or by necessary implication rules out mens rea as a constituent part of a crime,
an accused cannot be found guilty of an offence against the criminal law unless he has got a
guilty mind. Therefore, mens rea is an essential ingredient of an offence under Section 7 of
the Act.
Answer 1(vi)
International Copyrights
The Copyright Act, 1957 applies only to works first published in India, irrespective of the
nationality of the author. However Section 40 of the Act empowers the Government of India to
extend the benefits of all or any of the provisions of the Act to works first published in any
foreign country. The benefits granted to foreign works will not extend beyond what is available
to the works in the home country and that too on a reciprocal basis i.e. the foreign country
must grant similar protection to works entitled to copyright under the Act. The term of
Copyright in India to the foreign work, will not exceed that conferred by the foreign country.
Government of India has passed the International Copyright Order, 1958. According to this
order any work first published in any country which is a member of the Berne Convention or
the Universal Copyright Convention will be accorded the same treatment as if it was first
published in India.
Question 2
State, with reasons in brief, whether the following statements are correct or incorrect.
Attempt any five:
(i)The Consumer Protection Act, 1986 only reinforces the doctrine of caveat emptor.
(ii)In all legal proceedings relating to trade mark registered under the Trade Marks Act,
1999, the original registration and all subsequent assignments and transmissions
thereof shall be prima facie evidence of its validity.
(iii)Cartel includes an association of producers, sellers or distributors who, by
agreement among themselves, limit, control or attempt to control the production,
distribution, sale or price of or trade in goods or provision of services.
(iv)Trade practice includes a single or isolated action of any person in relation to any
trade.
(v)While calculating the value of plant and machinery for the purposes of small
scale/ancillary industrial undertaking, the following shall be included ––
(a)the cost of installation of plant and machinery;
(b)the cost of research and development equipment and pollution control
equipments;
(c)the cost of fire fighting equipments; and
(d)the charges paid for technical know-how for erection of plant and machinery.
(vi)Special Economic Zone (SEZ) is deemed to be a foreign territory for the purposes
of trade operations, duties and tariffs. (3 marks each)
Answer 2(i)
Incorrect. The doctrine of ‘Caveat Emptor’ or ‘let the buyer beware’ which came into
existence in the middle ages has been replaced by the principle of ‘consumer sovereignty’
.The Consumer Protection Act aims at protection of consumers and to provide for remedies
which are simpler, more accessible, quicker and less expensive. It would not be wrong to say
that Act is more inclined towards the principle of ‘consumer sovereignty.’
Answer 2(ii)
Correct; Section 31 of the Trade Marks Act, 1999 stipulates that in all legal proceedings
relating to trade mark registered under the Act, the original registration and all subsequent
assignments and transmission thereof shall be prima facie evidence of its validity.
Answer 2(iii)
Correct; ‘Cartel’ as defined under section 2(c) of the Competition Act,2002 includes an
association of producers, sellers or distributors, traders or service providers who, by
agreement amongst themselves, limit control or attempt to control the production, distribution,
sale or price of or, trade in goods.
Answer 2(iv)
Correct; As per Section 2(u) of the MRTP Act, 1969, ‘Trade Practice’ means any practice
relating to the carrying on of any trade and includes − (i) anything done by any person which
controls or affects the price charged by or the method of trading of any trader or any class of
trader (ii) a single or isolated action of any person in relation to any trade.
However, it has also been held that to be a ‘practice a particular conduct must be
repetitive in nature; if it has happened in one particular case for which there is some
explanation, it cannot be said to be practice. (In Re: Auto Agents and Bajaj Auto Ltd. RTP
Enq. No. 129/1986 order dated 10.12.1990)
Answer 2(v)
Incorrect; in calculating the value of plant and machinery for the purposes of small
scale/ancillary industrial undertaking the cost of installation of plant and machinery; the cost of
research and development equipment and pollution control equipment; cost of fire fighting
equipments and charges paid for technical know-how for erection of plant and machinery are
excluded.
Answer 2(vi)
Correct; Special Economic Zone (SEZ) is a specifically delineated duty free enclave and
shall be deemed to be foreign territory for the purposes of trade operations and duties and
tariffs.
Question 3
(a)Distinguish between any two of the following :
(i)‘Intellectual property’ and ‘industrial property’.
(ii) ‘Contract of service’ and ‘contract for service’.
(iii)‘Patent’ and ‘patent of addition’. (5 marks each)
(b)Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s) :
(i)Foreign contribution means donation, delivery or transfer made by any foreign
source of any article, if the market value in India, of such article, on the date of such
gift, delivery or transfer, exceeds Rs._____________.
(ii)Environmental clearance is not required from the Central Government, if
investment is less than _____________ for any item reserved for the small scale
sector.
(iii)The amount representing the full export value of goods or software exported is
required to be realised and repatriated to India within _____________ month(s)
from the date of export.
(iv)The term of every patent granted after the commencement of the Patents
(Amendment) Act, 2002 shall be _____________ year(s) from the date of filing of
application for the patent.
(v)Literary, dramatic, musical or artistic works enjoy copyright protection for the life
time of the author plus _____________ year(s) beyond the death of the author. (1
mark each)
Answer 3(a)(i)
Intellectual Property
As the term intellectual property relates to the creations of human mind and human
intellect, this property is called Intellectual property. In other words, intellectual property
relates to pieces of information which can be incorporated in tangible objects at the same time
in an unlimited number of copies at different locations anywhere in the world. The property
right does not vest in those copies but in the information reflected in those copies. Similar to
property rights in movable and immovable property, intellectual property is also characterised
by certain rights as well as limitations such as right to use and licence and also limited
duration in the case of copy right and patents.
Industrial Property
The expression ‘Industrial Property’ is sometimes misunderstood as relating to movable or
immovable property used for industrial production. However, industrial property is a kind of
intellectual property and relates to creation of human mind, e.g., inventions and industrial
designs. Simply stated, inventions are new solutions to technological problems, and industrial
designs are aesthetic creations determining the appearance of industrial products. In addition,
industrial property includes trademarks, service marks, commercial names and designations,
including indications of source and appellations of origin, and the protection against unfair
competition.
The term ‘Industrial Property’ may not appear entirely logical in the sense that the
inventions are only concerned with the industry. In other words, the inventions are exploited in
industrial plants while the trademarks, service marks, trade names and service names are
concerned with both the commerce as well as industry. Notwithstanding the lack of logic, this
term has acquired a meaning which clearly covers inventions as well as other marks. The
Paris Convention also recognized industrial property to cover patent, trademark, service
mark, trade names, utility models, industrial designs, indication of source and appellations of
origin and the repression of unfair competition.
Answer 3(a)(ii)
Contract of Service and Contract for Service: The Supreme Court in the case of Indian
Merchants Association v. V P Santha, (CA No. 688 of 1993 decided on 13th November 1995)
observed that a contract for service implies a contract whereby one party undertakes to
render services e.g. professional or technical services to or for another in the performance of
which he is not subject to detailed direction and control but exercises professional or technical
skill and uses his own knowledge and discretion. A contract of service on the other hand
implies relationship of master and servant and involves an obligation to obey orders in the
work to be performed and as to its mode and manner of performance.
Answer to Question No. 3(a)(iii)
Particulars Patents Patent of addition
Meaning Patent is a monopoly Any improvement in or
grant and it enables the modification of an invention
inventor to control the described or disclosed in
output and within the the complete specification,
limits set by demand, the namely the main invention
price of the patented and the applicant also
products. applies for a patent for that
invention or is the patentee
in respect thereof.
Date of Anytime Same or later than the date
filing of the of filing of the application in
appli- respect of the main
cation invention.
Term Twenty years For a term equal to that of
the patent for the main
invention or so much
thereof as has not expired.
Novelty of Compulsory for grant of Regard shall be had also to
the patent the complete specification
invention in which the main invention
is described.
Answer 3(b)
(i)Rs. 1000/-
(ii)Rs. 10 million
(iii)12 months
(iv)Twenty
(v)Sixty
Question 4
(a)With reference to the relevant provisions of the Foreign Exchange Management Act,
1999 and the rules and regulations made thereunder, advise on the following:
(i)An Indian company engaged in financial sector is interested in making investment
in banking business abroad.
(ii)An Indian resident wants to purchase foreign securities by making remittances
from his resident foreign currency (RFC) account.
(iii)A Bangladeshi millionaire is interested to invest in India subject to FDI policy of
the Government of India.
(iv)An Indian public limited company wants to issue bonus shares to an existing
non-resident shareholder.
(v)An Indian citizen resident outside India is interested in acquiring a house in
Chennai and a farm house on the outskirts of Delhi. (1 mark each)
(b)Critically examine the application of the rule of strict liability while fixing the liability
for environmental pollution. (5 marks)
(c)Jolly Ltd. maintained a guest house for the use of its managing director and other
executives. It entered into an agreement with a firm for the installation of central air-
conditioning system. The system installed did not function, developed snags and there
was leakage of water from ducting system. The company filed a complaint claiming
compensation for deficiency in service under the Consumer Protection Act, 1986. Will
it succeed ? Give reasons with reference to case law, if any. (5 marks)
Answer 4(a)(i)
Indian parties are prohibited from making investment in a foreign entity engaged in
banking business and real estate.
Answer 4(a)(ii)
In terms of Regulation 4 of Foreign Exchange Management (Transfer or Issue of any
Foreign Security) Regulations, 2000 general permission has been granted to residents for
purchase/acquisition of securities out of funds held in RFC account maintained in accordance
with the FEM (Foreign Currency Accounts) Regulations 2000.
Answer 4(a)(iii)
Foreign Investment in India is governed by the FDI policy announced by the Government
of India and the provisions of the Foreign Exchange Management Act (FEMA) 1999. Reserve
Bank has issued Foreign Exchange Management (Transfer or issue of security by a person
resident outside India) Regulations, 2000 in this regard which has been amended from time to
time. As per the regulations a citizen of Bangladesh is prohibited to invest in India.
Answer 4(a)(iv)
FEMA provisions allow Indian companies to freely issue bonus shares to existing non-
resident share-holders, subject to adherence to sectoral cap, if any. However, such issue of
bonus shares has to be in accordance with other laws/statutes like the Companies Act, 1956,
SEBI (ICDR) Regulations 2009(in case of listed companies) etc.
Answer 4(a)(v)
The Foreign Exchange Management (Acquisition and Transfer of Immovable Property in
India) Regulations, 2000, issued by the RBI provide that an Indian citizen resident outside
India may acquire any immovable property in India other than agricultural/plantation/ farm
house. Therefore in the present case, he may acquire a house in Chennai but is not permitted
to acquire a farm house at outskirts of Delhi.
Answer 4(b)
The 1861 ruling of the English Court in Rylands v. Fletcher provides that the person who
for his own purpose brings on to his land and collects and keeps there anything likely to do
mischief if it escapes must keep so at his peril and if he fails to do so, is prima facie liable for
the damage. The liability under this rule is strict and it is no defence that the thing escaped
without that persons wilful act, default or neglect or that he had no knowledge of its existence.
On the question of liability of an enterprise engaged in hazardous activities, the Supreme
Court in the case of M.C. Mehta and Another v. Union of India and others [(1987) 1 Comp. LJ
99 (SC)] laid down for the first time a far-reaching ruling, that an enterprise which is engaged
in hazardous or inherently dangerous activity and an industry which poses a potential threat
to the health and safety of the persons working in the factory and of those residing in the
surrounding area owes an absolute and non-delegatable duty to the community to ensure that
no harm results to any one on account of an hazardous or inherently dangerous nature of the
activity which it has undertaken. The Court further reiterated that the rule in Rylands v.
Fletcher [(1861-73) All.E.R. 146 HL] of strict liability would apply in India but without any
exceptions whatsoever recognised in England.
In this way the Supreme Court has moved a step ahead to apply the principle of strict
liability without any exceptions which may be known as principle of absolute liability.
Answer 4(c)
The facts of the case are similar to that of J.K. Puri Engineers v. Mohan Breweries &
Distilleries Ltd. [First Appeal No. 32 of 1993 decided on 15.2.1996 (NCDRC)]. In this case the
National Commission observed that the guest house was intended only for the residence of
the directors, including the Managing Director and other executives of the company during
their visits to the city. The system was installed only to provide comfort of these persons, may
be in connection with their official and business activity. It was not used for a commercial
purpose. It had no close or direct nexus with the commercial activity carried on by the
company.
The Commission further held that even where the goods are purchased for commercial
purpose, if there is a warranty, as in this case, for its maintenance, the purchaser becomes a
consumer in respect of the services rendered or to be rendered by the manufacturer or
supplier during the warranty period.
Jolly Ltd. would therefore, be a consumer and would be entitled to be compensated for the
deficiency in service from the service provider.
Question 5
(a)Mention five important grounds for opposition to the grant of patents.
(5 marks)
(b)Critically examine how environmental pollution violates human rights.
(5 marks)
(c)Evaluate the efficacy of the Essential Commodities Act, 1955 in controlling the
production, supply and distribution of essential commodities in the country. (5
marks)
Answer 5(a)
Section 25 of the Patents Act, 1970 deals with opposition to grant of patent and provides
that the grant of patent may be opposed on the following grounds:
(a)that the applicant for the patent or the person under or through whom he claims,
wrongfully obtained the invention or any part thereof from the opponent or from a
person under or through whom he claims;
(b)that the invention so far as claimed in any claim of the complete specification has
been published before the priority date of the claim —
(i)in any specification filed in pursuance of an application for a patent made in India
on or after the 1st day of January, 1912; or
(ii)in India or elsewhere, in any other document :
Provided that the ground specified in sub-clause (ii) shall not be available where
such publication does not constitute an anticipation of the invention by virtue of sub-
section (2) or sub-section (3) of section 29;
(c) that the invention so far as claimed in any claim of the complete specification is
claimed in a claim of a complete specification published on or after the priority date of
the applicant’s claim and filed in pursuance of an application for a patent in India, being
a claim of which the priority date is earlier than that of the applicant’s claim;
(d)that the invention so far as claimed in any claim of the complete specification was
publicly known or publicly used in India before the priority date of that claim.
Explanation — For the purposes of this clause, an invention relating to a process for
which a patent is claimed shall be deemed to have been publicly known or publicly
used in India before the priority date of the claim if a product made by that process had
already been imported into India before that date except where such importation has
been for the purpose of reasonable trial or experiment only;
(e)that the invention so far as claimed in any claim of the complete specification is
obvious and clearly does not involve any inventive step, having regard to the matter
published as mentioned in clause (b) or having regard to what was used in India before
the priority date of the applicant’s claim;
(f)that the subject of any claim of the complete specification is not an invention within
the meaning of this Act, or is not patentable under this Act;
(g)that the complete specification does not sufficiently and clearly describe the
invention or the method by which it is to be performed;
(h)that the applicant has failed to disclose to the Controller the information required by
section 8 or has furnished the information which in any material particular was false to
his knowledge;
(i)that in the case of convention application, the application was not made within twelve
months from the date of the first application for protection for the invention made in a
convention country by the applicant or a person from whom he derives title;
(j)that the complete specification does not disclose or wrongly mention the source of
geographical origin of biological material used for the invention;
(k)that the invention so far as claimed in any claim of the complete specification is
anticipated having regard to the knowledge, oral or otherwise, available within any
local or indigenous community in India or elsewhere.
Answer 5(b)
Life, livelihoods, culture and society, are fundamental aspects of human existence – hence
their maintenance and enhancement is a fundamental human right. Destruction of
environment and thereby of the natural resources, is therefore, a violation or leads to the
violation of human rights – directly by undermining the above aspects of human existence, or
indirectly by leading to other violations of human rights, for example through social disruption,
conflicts and even war. Conversely, human rights violations of other kinds can lead to
environmental destruction, for instance, displacement by social strife/war can cause
environmental damage in areas of relocation; or breakdown in sustainable common property
management. The manifestations of such violations present themselves through a loss of
access to clean air and water; loss of access to productive land; loss of energy sources and
biomass; loss of food and health security; social and economic marginalization and physical
displacement.
Even after prolonged experiments the scientist could not establish, that human can survive
in any other planet except earth. In the past, we had a great tradition of environment
conservation which taught us to respect nature and to take cognizance of the fact that all
forms of life-human, animal and plant are closely interlinked and that disturbance in one gives
rise to an imbalance in others. This principle is included in the Directive Principles in the
Constitution of India.
The Supreme Court in M.C. Mehta and Another v. Union of India and others [(1987) 1
Comp. LJ 99 (SC)] ruled that an application for compensation in a pollution case can be
maintained under Article 32 of the Constitution, for, such application is for the protection of the
fundamental rights of the people and the Court has all incidental and ancillary powers
including the power to forge new remedies and fashion new strategies designed to enforce
fundamental rights.
Answer 5(c)
The Government has powers under the Essential Commodities Act, 1955 to declare a
commodity as an essential commodity to ensure its availability to people at fair price. The Act
allows the Government to control the production, supply, and distribution of these
commodities for maintaining or increasing supplies and securing their equitable distribution.
Essentially, the Act aims to ensure easy availability of important commodities to consumers
and check exploitation by traders.
The Act is implemented by the state governments and union territories, leaving the Central
government to merely monitor the action taken by states in implementing the provisions of the
Act. State and UT administrations use the powers of the Act to impose stock or turnover limits
for various commodities and penalise those who hold them in excess of the limit. Stock limits
have been imposed in several states for pulses, edible oil, edible oilseeds, rice, paddy and
sugar.
Over a period of more than five decades the state governments and Union Territories
administration have successfully invoked the Act for ensuring availability of essential
commodities to the people.
PART—B
(Answer ANY TWO questions from this part.)
Question 6
Write notes on any four of the following :
(i)Principles governing domestic enquiry.
(ii)Purposes for which ESI fund may be expended under the Employees’ State
Insurance Act, 1948.
(iii)Procedure to be followed for the certification of standing orders under the Industrial
Employment (Standing Orders) Act, 1946.
(iv)‘Excluded employee’ under the Employees’ Provident Fund Scheme, 1952.
(v)Prohibition of employment of contract labour under the Contract labour (Regulation
and Abolition) Act, 1970.
(vi)Theory of notional extension of employment under the Workmen’s Compensation
Act, 1923. (5 marks each)
Answer 6(i)
Principles governing Domestic Enquiry
(a)The enquiry should be conducted by an unbiased person.
(b)He should conduct the enquiry honestly.
(c)The employee should be given a fair opportunity to defend himself.
(d)If any criminal proceeding is pending against the employee, the Enquiry Officer
need not wait for the completion of those proceedings [DCM v. Kushal Bhim AIR 1960
SC 806].
(e)Holding of preliminary enquiry is not mandatory.
(f)Proper procedure should be followed in conducting enquiry.
(g)The enquiry officer should briefly give reasons for reaching his conclusion.
Answer 6(ii)
Purposes for which the Fund may be expended
Section 28 of the E.S.I. Act provides that Fund shall be expended only for the following
purposes:
(i) payment of benefits and provisions of medical treatment and attendance to insured
persons and, where the medical benefit is extended to their families, in accordance
with the provisions of this Act and defraying the charge, and costs in connection
therewith;
(ii)payment of fees and allowances to members of the Corporation, the Standing
Committee and Medical Benefit Council, the Regional Boards, Local Committees and
Regional and Local Medical Benefit Councils;
(iii)payment of salaries, leave and joining time allowances, travelling and compensatory
allowances, gratuities and compassionate allowances, pensions, contributions to
provident or other benefit fund of officers and servants of the Corporation and meeting
the expenditure in respect of officers and other services set up for the purpose of
giving effect to the provisions of this Act;
(iv)establishment and maintenance of hospitals, dispensaries and other institutions and
the provisions of medical and other ancillary services for the benefit of insured persons
and where the medical benefit is extended to their families, their families;
(v)payment of contribution to any State Government, local authority or any private body
or individual towards the cost of medical treatment and attendance provided to insured
persons and where the medical benefit is extended to their families, their families
including the cost of any building and equipment, in accordance with any agreement
entered into by the Corporation;
(vi)defraying the cost (including all expenses) of auditing the accounts of the
Corporation and of the valuation of the assets and liabilities;
(vii)defraying the cost (including all expenses) of Employees Insurance Courts set up
under this Act;
(viii)payment of any sums under any contract entered into for the purposes of this Act
by the Corporation or the Standing Committee or by any officer duly authorized by the
Corporation or the Standing Committee in that behalf;
(ix)payment of sums under any decree, order or award, of any court or tribunal against
the Corporation or any of its officers or servants for any act done in execution of his
duty or under a compromise or settlement of any suit or any other legal proceedings
or claims instituted or made against the Corporation;
(x)defraying the cost and other charges of instituting or defending any civil or criminal
proceedings arising out of any action taken under this Act;
(xi)defraying expenditure within the limits prescribed, on measure for the improvement
of the health and welfare of insured persons and for the rehabilitation and re-
employment of insured persons who have been disabled or injured; and
(xii)such other purposes as may be authorized by the Corporation with the previous
approval of the Central Government.
Answer 6(iii)
Procedure for Certification of Standing Orders
Standing Orders as per section 2(g) of the Industrial Employment (Standing Orders) Act,
1946 means rules relating to matters set out in the Schedule to the Act.
Section 5 of the Act lays down the procedure to be followed by Certifying Officer. On
receipt of the draft Standing Order from the employer, the Certifying Officer shall forward a
copy thereof to the trade union of the workmen or where there is no trade union, then to the
workmen in such manner as may be prescribed, together with a notice requiring objections, if
any, which the workmen may desire to make in the draft Standing Orders. These objections
are required to be submitted to him within 15 days from the receipt of the notice.
On receipt of such objections he shall provide an opportunity of being heard to the
workmen or the employer and will make amendments, if any, required to be made therein and
this will render the draft Standing Orders certifiable under the Act and he will certify the same.
A copy of the certified Standing Orders will be sent by him to both the employer and the
employees association within seven days of the certification.
Answer 6(iv)
The term “excluded employee” has been defined in para 2(f) of the Employees’ Provident
Fund Scheme, 1952 as follows:
‘Excluded employee’ means:
(i) an employee who, having been a member of the Fund, withdraw the full amount of his
accumulations in the Fund under clause (a) or (c) of sub-paragraph 69;
(ii)an employee whose pay at the time be is otherwise entitled to become a member of
the Fund, exceeds five thousand rupees per month.
Explanation: “Pay” includes basic wages with dearness allowance retaining allowance
(if any) and cash value of food concession admissible thereon.
(iii)An apprentice.
Explanation: An apprentice means a person who, according to the certified standing
orders applicable to the factory or establishment is an apprentice, or who is declared to
be an apprentice by the authority specified in this behalf by the appropriate
Government.
Answer 6(v)
The ‘appropriate government’ under section 10(1) of the Contract Labour (Regulation and
Abolition) Act, 1970 is authorized after consultation with the Central Board or State Board, as
the case may be, to prohibit, by notification in the official gazette, employment of contract
labour in any establishment in any process, operation or other work.
Section 10 (2) of the Act lays down sufficient guidelines for deciding upon the abolition of
contract labour in any process, operation or other work in any establishment.
The guidelines are mandatory in nature and are:-
−Conditions of work and benefits provided to the contract labour.
−Whether the work is of Perennial nature.
−Whether the work is incidental or necessary for the work of an establishment.
−Whether the work is sufficient to employ a considerable number of whole-time
workmen.
−Whether the work is being done ordinarily through regular workman in that
establishment or a similar establishment.
Answer 6(vi)
Theory of notional extension of employment
To make the employer liable it is necessary that the injury caused by an accident must
have arisen in the course of employment. It means that the accident must take place at a
time and place when he was doing his master’s job.
It is well settled that the concept of “duty” is not limited to the period of time the workman
actually commenced his work and the time he downs his tools. It extends further in point of
time as well as place. But there must be nexus between the time and place of the
accident and the employment. If the presence of the workman concerned at the particular
point was so related to the employment as to lead to the conclusion that he was acting within
the scope of employment that would be sufficient to deem the accident as having occurred in
the course of employment (Weaver v. Tradegar Iron and Coal Co. Ltd., (1940) 3 All, ER 15).
It is known as doctrine of notional extension of employment; whether employment extends
to the extent of accident depends upon each individual case.
A workman while returning home after duty was murdered within the premises of the
employer. It was held that there was casual and proximate connection between the accident
and the employment. Since the workman was on spot only for his employment and his wife is
entitled for compensation (Naima Bibi v. Lodhne Colliery (1920) Ltd., 1977 Lab. I.C. NOC 14).
If an employee in the course of his employment has to be in a particular place by reason
where he has to face a peril which causes the accident then the casual connection is
established between the accident and the employment (TNCS Corporation v. Poonamalai,
1994 II LLN 950).
Question 7
(i)‘Legal strike’ and ‘justified strike’.
(ii)‘Principal employer’ and ‘immediate employer’ under the Employees’ State
Insurance Act, 1948.
(iii)‘Premises’ and ‘precincts’ under the Factories Act, 1948. (5 marks each)
word(s)/figure(s):
(i)The membership of provident fund scheme is compulsory for employees drawing
a pay not exceeding Rs.__________ per month.
(ii)__________ means termination of the service of an employee otherwise than on
superannuation.
(iii)Wages are to be paid within __________ working days from the date of
termination of the employee whatever be the reason of termination.
(iv)Superannuation in relation to an employee, who is a member of the pension
scheme, means the attainment of the age of __________ years.
(v)Under the Workmen’s Compensation Act, 1923, the employer shall not be liable
when the injury does not result in disablement for a period exceeding _______
days.(1 mark each)
(c)Choose the most appropriate answer from the given options in respect of the
following :
(i)An application for the recovery of bonus from an employer shall be made within —
(a)Six months from the date on which the money became due
(b)One year from the date on which the money became due
(c)60 Days from the date on which the money became due
(d)90 Days from the date on which the money became due.
(ii)The occupier of a factory is required to send a written notice to the Chief
Inspector of Factories at least —
(a)7 Days before he begins to occupy or use the premises as a factory
(b)15 Days before he begins to occupy or use the premises as a factory
(c)21 Days before he begins to occupy or use the premises as a factory
(d)10 Days before he begins to occupy or use the premises as a factory.
(iii)The State Government may make rules regarding the provisions and
maintenance of a canteen for the use of workers wherein more than —
(a)250 Workers are ordinarily employed
(b)500 Workers are ordinarily employed
(c)300 Workers are ordinarily employed
(d)100 Workers are ordinarily employed.
(iv)The minimum amount of compensation in case of permanent total disablement is
—
(a)Rs.1,00,000
(b)Rs.90,000
(c)Rs.80,000
(d)Rs.70,000.
(v)The Contract Labour (Regulation and Abolition) Act, 1970 applies to every
establishment or contractor wherein workmen employed on any day of the
preceding 12 months shall be —
(a)100 Workmen or more
(b)20 Workmen or more
(c)50 Workmen or more
(d)10 Workmen or more. (1 mark each)
Answer 7(a)
(i) Legal strike and justified strike
A strike is legal if it does not violate any provision of the statute. In the case of Indian
General Navigation and Rly. Co. Ltd. v. Their Workmen, (1960) I L.L.J. 13, the Supreme Court
held that the law has made a distinction between a strike which is illegal and one which is not,
but it has not made distinction between an illegal strike which may be said to be justifiable
and one which is not justifiable.
Whether a particular strike is justified or not is a question of fact which has to be judged in
the light of the facts and circumstances of each case. If workmen go on strike without
contravening statutory requirements, in support of their demands, the strike will be justified
The justifiability of strike has no direct relation to the question of its legality and illegality.
The justification of strike as held by the Punjab & Haryana High Court in the case of
Matchwell Electricals of India v. Chief Commissioner, (1962) 2 LLJ 289, is entirely unrelated to
its legality or illegality. The justification of strikes has to be viewed from the stand point of
fairness and reasonableness of demands made by workmen and not merely from stand point
of their exhausting all other legitimate means open to them for getting their demands fulfilled.
The Supreme Court in Gujarat Steel Tubes Ltd. v. Gujarat Steel Tubes Majdoor Sabha,
AIR 1980 SC 1896 held that justifiability of a strike is purely a question of fact. Therefore, if
the strike was resorted to by the workers in support of their reasonable, fair and bona fide
demands in peaceful manner, then the strike will be justified. Where it was resorted to by
using violence or acts of sabotage or for any ulterior purpose, then the strike will be
unjustified.
(ii) Immediate employer & principal employer
According to Section 2(13A) of the E.S.I. Act, 1948 “immediate employer” means a
person, in relation to employees employed by or through him, who has undertaken the
execution on the premises of a factory or an establishment to which this Act applies or under
the supervision of principal employer or his agent, of the whole or any part of any work which
is ordinarily part of the work of the factory or establishment of the principal employer or is
preliminary to the work carried on, in or incidental to the purpose of any such factory or
establishment, and includes a person by whom the services of an employee who has entered
into a contract of service with him are temporarily lent or let on hire to the principal employer
and includes a contractor.
“Principal Employer” as per Section 2(17) means the following:
(i)in a factory, owner or occupier of the factory and includes the managing agent of
such owner or occupier, the legal representative of a deceased owner or occupier and
where a person has been named as the manager of the factory under the Factories
Act, 1948, the person so named;
(ii)in any establishment under the control of any department of any Government in
India, the authority appointed by such Government in this behalf or where no authority
is so appointed the head of the Department.
(iii)in any other establishment, any person responsible for the supervision and control
of the establishment.
(iii) Premises and precincts
The word “premises” is a generic term meaning open land or land with building or building
alone. The term ‘precincts’ is usually understood as a space enclosed by walls. Expression
‘premises’ including precincts does not necessarily mean that the premises must always have
precincts. It merely shows that there may be some premises with precincts and some
premises without precincts. The word ‘including is not a term’ restricting the meaning of the
word ‘premises’, but is a term which enlarges its scope. All the length of railway line would be
phase wise factories (LAB IC 1999 SC 407). Company engaged in construction of railway line
is factory. (LAB IC 1999 SC 407).
The Supreme Court in Ardeshir H. Bhiwandiwala v. State of Bombay, AIR 1962 S.C. 29,
observed that the legislature had no intention to discriminate between workers engaged in a
manufacturing process in a building and those engaged in such a process on an open land
and held that the salt works, in which the work done is of conversion of sea water into crystals
of salt, come within the meaning of the word ‘premises’.
Answer 7(b)
(i)Rs.6500
(ii)Retrenchment
(iii)Two
(iv)58 years
(v)3 days
Answer 7(c)
(i)(b) One Year
(ii)(b) 15 days
(iii)(a) 250 workers
(iv)(b) Rs.90,000
(v)(b) 20 workmen or more
Question 8
Attempt any five of the following stating relevant legal provisions and decided case law, if
any:
(i)A driver of bus belonging to the employer was involved in an accident which resulted
in the impairment of free movement of his left hand disabling him from driving vehicles.
He was, however, capable of performing other work. He claimed compensation
contending that the said accident had resulted in permanent disablement of driving
vehicles. Will he succeed?
(ii)The workers were engaged by beedi manufacturer for rolling beedies at home
subject to the rejection of defective beedies by manufacturer. The workers claimed that
they should be treated as ‘workers’ under the provisions of the Factories Act, 1948.
Will they succeed?
(iii)An out-worker prepared goods at his residence and later on supplied these goods
to the employer. Will he be treated as an employee under the Minimum Wages Act,
1948?
(iv)Mauji ram was absent from duty without leave. the employer took the plea that it
had resulted in the breach of continuous service for the purposes of gratuity under the
Payment of Gratuity Act, 1972. Is the plea of the employer legal and enforceable?
(v)A company was running into losses and was unable to pay the minimum rates of
wages to its workers. The workers pleaded that the employer must pay them the
minimum rates of wages. The employer (company) intends to go to the court
challenging the constitutional validity of the Minimum Wages Act, 1948. Will the
company succeed?
(vi)An employee was on his way to the factory. He met with an accident one kilometre
away from the place of his employment. He pleaded that the injury was caused by
accident “arising out of and in the course of employment” and claimed employment
injury benefits under the Employees’ State Insurance Act, 1948. Will the employee
succeed ?
(vii)Some contract labour was engaged by an organisation. There was subsequently
prohibition of employment of contract labour in that category as a consequence of the
notification issued by the Central Government. The employer did not absorb the
contract labour and employ them on regular basis. The workmen challenged the action
of the organisation. Will they succeed? (4 marks each)
Answer 8
(i) The driver will not succeed. In Divisional Manager KSRTC v. Bhimaiah, 1977 II L.L.J.
521, it has been held that where the workman, a driver of bus belonging to the employer was
involved in an accident which resulted in an impairment of the free movement of his left hand
disabling him from driving vehicles, it was held that this is not one of the injuries mentioned in
the 1st Schedule which are accepted to result in permanent total disablement. In the present
case the workman was also capable of performing duties and executing works other than
driving vehicles. Nature of injury is to be determined not on the basis of the work he was
doing at the time of accident.
(ii) The workers will not succeed. In Shankar Balaji Waje v. State of Maharashtra, AIR
1963 Bom. 236, the question arose whether bidi roller is a worker or not. The management
simply says that the labourer is to produce bidies rolled in a certain form. How the labourer
carried out the work is his own concern and is not controlled by the management, which is
concerned only with getting bidies rolled in a particular style with certain contents.
The Supreme Court held that the bidi roller is not a worker. The whole conception of
service does not fit in well with a servant who has full liberty to attend to his work according to
his pleasure and not according to the orders of his master. Where the employer did retain
direction and control over the workers both in manner of the nature of the work as ‘also its
details they will be held as workers.
(iii) Yes as per the decision in case of Loknath Nathu Lal v. State of Madhya Pradesh
A.I.R. 1960 M.P. 181. In this case, an out-worker who prepared goods at his residence, and
then supplied them to his employer was held as employee in respect of the provisions of the
Minimum Wages Act, 1948.
(iv) The plea of the employer is not legally enforceable. Mere absence from duty without
leave can not be said to result in breach of continuity of service in respect of the provisions of
the payment of Gratuity Act, 1972. [Kothari Industrial Corporation v. Appellate Authority, 1998
Lab IC, 1149 (AP)]
(v) The company will not succeed. The principles governing fixation of minimum wages are
based on ethical considerations and not on any economic ground. The minimum wage has no
reference either to the value of the work done by the worker or to the capacity of the industry
to pay.
Minimum wages must be paid in any event. Broadly speaking, the first principle is that
there is a minimum wage which, in any event, must be paid, irrespective of the extent of
profits, the financial condition of the establishment or the availability of workmen on lower
wages. The minimum wage is independent of kind of industry and applies to all, big or small
alike. It sets the lowest limit below which wages cannot be allowed to sink in all humanity
[Kamani Metals & Alloys Ltd. v. The Workmen, A.I.R. (1967) S.C. 1175].
“There is one principle which admits of no exceptions. No industry has a right to exist
unless it is able to pay its workmen at least a base minimum wage. It is quite likely that in
underdeveloped countires where unemployment prevails on a very large scale, unorganized
labour may be available on starvation wages, but the employment of labour on starvation
wages cannot be encouraged or favoured in a modern democratic welfare State. If an
employer cannot maintain his enterprise without cutting down the wages of his employees
below even a bare subsistence or minimum wage, he would have no right to conduct his
enterprise on such terms.”
(vi) The employee will not succeed. In the case of Regional Director ESI v. Francis de
Costa, 1997 LLJ I 34 SC, the Court held that where an employee who is on his way to factory
meets with an accident, one K.M. from the place of employment, the injury cannot be said to
be caused by accident arising out of and in the course of his employment. Mere road accident
on a public road while employee was on his way to place of employment cannot be said to
have its origin in his employment in the factory.
(vii) The workmen will not succeed. In Steel Authority of India v. National Union of Water
Front Workers and others, AIR 2001 SC 3527, the Supreme held that neither Section 10 of
the Act nor any other provision in the Act whether expressly or by necessary implication
provides for automatic absorption of contract labour on issuing a notification by the
Appropriate Government under Section 10(1) prohibiting employment of contract labour in
any process or operation or other work in any establishment. Consequently, the principal
employer cannot be required to order absorption of contract labour working in the concerned
establishment.
SECURITIES LAWS AND COMPLIANCES
Time allowed: 3 hours Max. Marks: 100
PART—A
(Answer Question No.1 which is COMPULSORY and
ANY THREE of the rest from this part.)
Question 1
(a)State, with reasons in brief, whether the following statements are correct or
incorrect :
(i)Capital market is wider than securities market.
(ii)Mandatory client code facilitates market surveillance.
(iii)CAMEL model is used for rating of banking companies.
(iv)A foreign currency convertible bond is a quasi-debt instrument.
(v)The placement memorandum is to be issued for private circulation only after the
expiry of 21 days of its submission to SEBI.
(2 marks each)
words(s)/figure(s) :
(i)Credit rating is considered more relevant for gradation of ___________.
(ii)Clearing corporation deals with ___________.
(iii)Securities in ___________ are not available for buy-back until the period expires.
(iv)Indian money market is getting integrated with the global market through
____________.
(v)____________ is a stabilization tool for post-listing price of newly issued shares.
(1 mark each)
Answer 1(a)
(i)Correct. The Capital Market is a market for financial investments that are direct or
indirect claims to capital. It is wider than the Securities Market and embraces all forms
of lending and borrowing, whether or not evidenced by the creation of a negotiable
financial instrument. The securities market, however, refers to the markets for those
financial instruments/claims/ obligations that are commonly and readily transferable by
sale.
(ii)Correct. Mandatory Client Code establishes the identity of buyers and sellers of
securities and improves and facilitates market surveillance. The client code is made
mandatory at the broker’s level operating on all the stock exchanges.
(iii)Incorrect. CAMEL Model is used for rating non-banking financial services.
(iv)Correct. A Foreign Currency Convertible Bond (FCCB) is a quasi debt instrument
36 debt security which can be converted into shares or into
which represents equity linked
depository receipts.
(v)Correct. The placement memorandum is to be issued for private circulation only
after the expiry of 21 days of its submission to SEBI.
Answer 1(b)
(i)Debt instruments
(ii)The delivery of and payment for securities or/and periodical settlement of contract
or/and matter connected or incidental to transfer.
(iii)Lock-in-period
(iv)Resource mobilization from international sources
(v)Green Shoe Option
Question 2
(a)Write short notes on the following :
(i)Mortgage backed securities
(ii)Basket trading system
(iii)Market abuse
(iv)Debt for equity swap. (2 marks each)
(b)Expand the following abbreviations :
(i)MCFS
(ii)SPDR
(iii)WMA. (1 mark each)
(c)Explain the investment criteria for a foreign venture capital fund in India.
(4 marks)
Answer 2(a)(i)
Mortgage backed securities
Mortgage backed securities assure a fixed return which is derived from the performance of
the specific assets. They are issued with a maturity period of 3 to 10 years and backed by
pooled assets like mortgages, credit card receivables, etc. There is a commitment from the
loan originator and/or intermediary institution to ensure a minimum yield on maturity.
Answer 2(a)(ii)
Basket trading system
In this system, the investors through the member brokers of the exchange are able to buy
or sell all 30 scrips of Sensex in one go in the proportion of their respective weights in the
sensex. The investors can also create their own baskets by deleting certain scripts from 30
scrips in the sensex.
Answer 2(a)(iii)
Market abuse
Market abuse is a term referring to abnormal price/volume movement, artificial
transactions, false or misleading impressions, insider trading, etc. In order to detect aberrant
behaviour/movement, it is pre-requisite to define the normal market behaviour.
Answer 2(a)(iv)
Debt for equity swap
These instruments give an offer to the debt holders to exchange the debt or equity shares
of the company. The issuers offering debt for equity swaps increase equity capital by
improving their debt-equity ratios and enhancing their debt issuing capacity.
Answer 2(b)
(i)MCFS – Modified Carry Forward System
(ii)SPDR – Standard & Poor’s Depository Receipt
(iii)WMA – Ways and Means Advance
Answer 2(c)
Investment Criteria for a Foreign Venture Capital Fund
All investments to be made by foreign venture capital fund are subject to the following
conditions:
(a)it should disclose its investment strategy to SEBI.
(b)it can invest its total funds committed in one venture capital fund.
(c)it shall make investments as enumerated below:
(i)atleast 66.67% of the investible funds should be invested in unlisted equity shares
or equity linked instruments.
(ii)not more than 33.33% of the investible funds may be invested by way of:
(a)subscription to initial public offer of a venture capital undertaking whose
shares are proposed to be listed;
(b)debt or debt instrument of a venture capital undertaking in which the foreign
venture capital investor has already made an investment by way of equity.
(c)preferential allotment of equity shares of a listed company subject to lock in
period of one year.
(d)the equity shares or equity linked instruments of a financially weak company
or a sick industrial company whose shares are listed.
(e)Special Purpose Vehicles which are created for the purpose of facilitating or
promoting investment in accordance with SEBI (Foreign Venture Capital
Investors) Regulations, 2004.
(f)It shall disclose the duration of life cycle of the fund.
Question 3
(a)Explain the following terms related to capital market :
(i)Commodity pool
(ii)Depository participant. (2 marks each)
(b)Explain the following terms related to money market :
(i)Auction
(ii)Primary dealer. (2 marks each)
(c)Write a brief note on ‘market making’. (3 marks)
(d)“Primary market is of great significance to the economy.” Comment.
(4 marks)
Answer 3(a)(i)
Commodity pool
Commodity pool is investment trusts, syndicates or similar enterprises that are operated
for the purpose of trading commodity futures. The investment concentration in commodity
pool is in commodity futures.
Answer 3(a)(ii)
Depository participant
A depository participant (DP) is the representative (agent) of the investor in the depository
system providing the link between the company and investor through the depository.
Answer 3(b)(i)
Auction
Auctions for government securities are either yield based or price based. In an yield based
auction, the Reserve Bank of India announces the issue size (or notified amount) and the
tenor of the paper to be auctioned. In a price based auction, the RBI announces coupon rate
also in addition to the issue size (or notified amount) and the tenor of the paper to be
auctioned.
Answer 3(b)(ii)
Primary dealer
Primary Dealer means a non-banking financial company which holds a valid letter of
authorization as a Primary Dealer issued by the Reserve Bank, in terms of the Guidelines for
Primary Dealers in Government Securities Market.
Answer 3(c)
Market Making
Market making is a process whereby two way quotes are offered for the purpose of
facilitating trading in respect of a certain scrip. Market making affords much-needed liquidity
to the securities. Moreover, it also increases the supply of scrips in the market and also
triggers demand for the scrips in the market. Market making also helps in reducing the
concentration.
Answer 3(d)
The market wherein resources are mobilised by companies through issue of new
securities is called the primary market. The issuer of securities sells the securities in the
primary market to raise funds for investment and/or to discharge some obligation.
The Primary Market (New Issues) is of great significance to the economy of a country. It is
through the primary market that funds flow for productive purposes from investors to
entrepreneurs. The latter use the funds for creating new products and rendering services to
customers in India and abroad. The primary market creates and offers the merchandise for
the secondary market.
Question 4
(i)‘Funds pay-in’ and ‘funds pay-out’.
(ii)‘Merchant banker’ and ‘portfolio manager’.
(iii)‘Commercial bills’ and ‘commercial papers’. (3 marks each)
(b)What is a ‘self-regulatory organisation’ ? What are its functions and obligations?
(5 marks)
(c)Discuss the factors generally considered by credit rating agencies for the rating of
manufacturing companies. (4 marks)
Answer 4(a)(i)
Funds pay-in and Funds pay-out
Funds Pay-in: Once the reconciliation of securities is completed by the Clearing House,
the bank accounts of member-brokers maintained with the clearing banks, are directly debited
through computerized posting for their funds settlement obligations. This process is referred
to as Pay-in of funds.
Funds Payout: The bank accounts of the member-brokers having pay-out of funds are
credited by the Clearing House with the Clearing Banks on the same day. This process is
referred to as Pay-out of Funds.
Answer 4(a)(ii)
Merchant Banker and Portfolio Manager
Merchant Banker means any person engaged in the business of issue management by
making arrangements regarding selling, buying or subscribing to securities or acting as
manager/consultant/advisor or rendering corporate advisory services in relation to such issue
management.
Portfolio Manager means any person who pursuant to contract or arrangement with the
client, advises or directs or undertakes on behalf of the client (whether as a discretionary
portfolio manager or otherwise) the management or administration of a portfolio of securities
or the funds of the clients as the case may be.
Answer 4(a)(iii)
Commercial Bills and Commercial papers
Commercial bills are basically negotiable instruments accepted by buyers for goods or
services obtained by them on credit. Such bills being bills of exchange can be kept upto the
due date and encashed by the seller or may be endorsed to a third party in payment of dues
owing to the latter.
Commercial Paper (CP) is an unsecured money market instrument issued in the form of a
promissory note. CP is a privately placed instrument. It enables highly rated corporate
borrowers to diversity their sources of short-term borrowings and provides an additional
instrument to investors.
Answer 4(b)
‘Self Regulatory Organization’ means an organization of intermediaries which is
representing a particular segment of the securities market and which is duly recognised by
the SEBI, but excludes a stock exchange.
Functions and Obligations of Self Regulatory Organization
A Self Regulatory Organization is responsible for investor protection and education of
investors or its members and ensures observance of Securities Laws by its members. There
is standard code of conduct for its members. The SRO conducts inspection and audit of its
members, on regular basis, through independent auditors. SEBI is to be promptly informed of
violations of the provisions of the Act, rules, regulations, directions, circulars or the guidelines
by any of its members. SRO is required to conduct screening and certification tests for its
members, agents and such other persons as it may determine. SRO is required to conduct
training programmes for its members or agents. SRO must act in utmost good faith and must
avoid conflict of interest in the conduct of its functions. The SRO must comply with the norms
of corporate governance as applicable to listed companies.
Answer 4(c)
The factors generally considered by Credit Rating Agencies for rating of manufacturing
companies are as under:
−Industry Risk
−Company’s industry and market position
−Operating efficiencies
−Accounting Quality
−Financial flexibility
−Earnings expectation
−Financial leverage
−Cash flow adequacy
−Management evaluation
Question 5
(a)Explain briefly the responsibilities and obligations of a debenture trustee.
(4 marks)
(b)Explain briefly the broad framework for short selling. (4 marks)
(c)The redemption price of a mutual fund unit is Rs.48 while the front-end load and
back-end load charges are 2% and 3% respectively. You are required to calculate —
(i)Net asset value per unit; and
(ii)Public offer price of the unit. (7 marks)
Answer 5(a)
Responsibilities and Obligations of Debenture Trustees
Regulation 13 of SEBI (Debenture Trustees) Regulations, 1993 lays down that no
debenture trustee who has been granted a certificate by SEBI shall act as debenture trustee
unless he enters into a written agreement with the body corporate before the opening of the
subscription list for issue of debentures and the agreement inter alia contains a statement to
the fact that debenture trustee has agreed to act as such under the trust deed for securing an
issue of debentures for the body corporate and the time limit within which the security for the
debentures shall be created. Regulation 13A stipulates that no debenture trustee shall act as
such for any issue of debentures in case, it is an associate of the body corporate; or has lent
and the loan is not yet fully repaid or is proposing to lend money to the body corporate.
Regulation 14 provides that every debenture trustee shall amongst other matters accept the
trust deed which contains the matters specified in these Regulations.
Answer 5(b)
‘Short Selling’ is defined as selling a stock which the seller does not own at the time of
trade. All classes of investors, viz., retail and institutional investors, shall be permitted to short
sell. In order to provide a mechanism for borrowing of securities to enable settlement of
securities sold short, the stock exchanges has put in place, a full fledged securities lending
and borrowing (SLB) scheme that is open for all market participants in the Indian securities
market.
SLB operates through Clearing Corporation / Clearing House of stock exchanges having
nation-wide terminals who will be registered as Approved Intermediaries (AIs) under the SLS,
1997. The SLB take place on an automated, screen based, order-matching platform which will
be provided by the AIs. The borrowers and lenders have access to the platform for
lending/borrowing set up by the AIs through the clearing members (CMs) (including banks
and custodians) who are authorized by the AIs in this regard. The tenure of lending/borrowing
is fixed as standardized contracts. The settlement of lending and borrowing transactions is
independent of normal market settlement.
Answer 5(c)
Calculation of NAV per unit and Public Offer Price per unit:
Net Asset Value
(i) Redemption of Price (ROP) =
1 + Back end Load
Net Asset Value per unit = ROP X (1+Back end load)

= 48X (1+.03)
= Rs. 49.44
Net Asset Value
(ii) Public offer Price =
1 + Front end Load
49.44
=
1 − 0.02
= Rs. 50.45
PART—B
(Answer ANY TWO questions from this part.)
Question 6
(a)“IPO grading is a service aimed at facilitating the assessment of the equity issue
offered to the public.” Discuss. (4 marks)
(b)Define ‘fast track issue’. List out the conditions to make a fast track issue.
(4 marks)
(c)What are the eligibility norms for public issue by an unlisted company ?
(4 marks)
(d)Briefly explain the following terms related to debt market :
(i)Pass through certificates
(ii)Benchmarked instruments
(iii)Inflation linked bonds
(iv)Floating interest rate. (2 marks each)
Answer 6(a)
IPO grading (initial public offering grading) is a service aimed to facilitating the
assessment of equity issues offered to public. The grade assigned to any individual issue
represents a relative assessment of the fundamentals of that issue in relation to the universe
of other listed equity securities in India. Such grading is assigned on a five-point scale with a
higher score indicating stronger fundamentals. IPO grading is a relative comparison of the
assessed fundamentals of the graded issue to other listed equity securities in India.
Answer 6(b)
SEBI has decided to enable listed companies satisfying certain specified requirement to
make fast track issue. Fast track issue is exempted from certain norms relating to filing of
draft offer document with SEBI and stock exchange subject to compliance of certain
conditions, which are as under:
(i)The shares of the company have been listed on any stock exchange having
nationwide terminals for a period of at least three years immediately preceding the
reference date.
(ii)The average market capitalization of public shareholding of the company is at least
Rs.10, 000 crores for a period of one year.
(iii)The annualized trading turnover of the shares of the company during six calendar
months immediately preceding the month of the reference date has been at least two
per cent of the weighted average number of shares listed during the said six months
period.
(iv) The company has redressed at least 95% of the total shareholder/investor
grievances or complaints.
(v)The company has complied with the listing agreement for a period of at least three
years immediately preceding the reference date.
(vi)The impact of auditors’ qualifications if any on the audited accounts of the company
in respect of the financial years for which such accounts are disclosed in the offer
document does not exceed 5% of the net profit/loss after tax of the company for the
respective years.
(vii)No prosecution proceedings or show cause notices has been issued by SEBI.
(viii)The entire shareholding of the promoter group is held in dematerialized form as on
the reference date.
Answer 6(c)
An unlisted company can make an initial public offering (IPO) of equity shares or any other
security which may be converted into or exchanged with equity shares at a later date, only if it
meets all the following conditions:
(a)The company has net tangible assets of at least Rs. 3 crores in each of the
preceding 3 full years (of 12 months each), of which not more than 50% is held in
monetary assets;
(b)The company has a track record of distributable profits in terms of Section 205 of
the Companies Act, 1956, for at least three out of immediately preceding five years;
(c)The company has a net worth of at least Rs.1 crore in each of the preceding 3 full
years (of 12 months each);
(d)The aggregate of the proposed issue and all previous issues made in the same
financial year in terms of size does not exceed five times its pre-issue net worth as per
the audited balance sheet of the last financial year.
(e)In case the company has changed its name within the last one year, at least 50% of
the revenue for the preceding 1 full year is earned by the company from the activity
suggested by the new name.
Answer 6(d)
(i)Pass through Certificates
When mortgages are pooled together and undivided interest in the pool are sold, pass
through securities certificates are created.
(ii)Benchmarked Instruments
These are certain debt instruments wherein the fixed income earned is based on a
benchmark. For instance the floating interest rate funds are benchmarked to either the
LIBOR or MIBOR.
(iii)Inflation Linked Bond
A bond is considered indexed for inflation if the payment on the instrument is indexed
by reference to the change in the value of a general price index over the term of the
instrument.
(iv)Floating Interest Rate
Floating interest rate simply means that the rate of interest is variable. The interest
rate payable for the next period is set with reference to a benchmark market rate
agreed upon by both the lender and borrower.
Question 7
(a)What is due diligence in the process of public issue of securities ? Explain its scope
and significance. (4 marks)
(b)What are the compliances under the listing agreement for Indian depository receipts
(IDRs) relating to appointment of Company Secretary and undertaking of due diligence
of Registrar and Transfer Agent (RTA), etc? (4 marks)
(c)State the conditions required to be fulfilled for conversion of external commercial
borrowings (ECBs) into equity. (4 marks)
(d)You are the Company Secretary of Great India Ltd. Prepare a Board note outlining
various requirements of SEBI guidelines for rights issue and list out the major steps
involved in rights issue. (8 marks)
Answer 7(a)
Due Diligence
In relation to public issue of securities, due diligence is carried out by a merchant banker.
Due Diligence includes all the activities that are associated with a public issue. It includes
carrying out reference checks on the related aspects.
The Lead Merchant Banker is responsible for verification of the contents of a prospectus
or the letter of offer in respect of an issue of securities and reasonableness of the views
expressed therein and to submit to SEBI due diligence certificate in the prescribed form. The
scope of Due Diligence includes examination of various documents including those relating to
litigation like commercial disputes, patent disputes, disputes with collaborators etc. Merchant
Banker also discuss with the company, its directors and other officers and other agencies on
matters including objects of the issue, projected profitability, price justification etc. before
giving the Due Diligence Certificate. It provides a comfort level to the company and regulators
that all compliances in relation to issue of shares have been complied with.
Answer 7(b)
Clause 23 of Listing Agreement for Indian Depository Receipts (IDRs) provides that the
issuer is required to :
(a)appoint the Company Secretary as Compliance Officer who will directly liaise with
the authorities such as SEBI, Stock Exchanges, ROC etc., and investors with respect
to implementation of various clauses, rules, regulations and other directives of such
authorities and investor service & complaints related matter.
(b)undertake a due diligence survey to ascertain whether the RTA is sufficiently
equipped with infrastructure facilities such as adequate manpower, computer hardware
and software, office space, documents handling facility etc., to serve the IDR holders.
Answer 7(c)
Conversion of ECB into equity
(i)Conversion of ECB into equity is permitted subject to the following conditions:
(a)The activity of the company is covered under the Automatic Route for Foreign
Direct Investment or Government approval for foreign equity participation has been
obtained by the company, wherever applicable,
(b)The foreign equity holding after such conversion of debt into equity is within the
sectoral cap, if any,
(c)Pricing of shares is as per the SEBI and erstwhile CCI guidelines/ regulations in
the case of listed/unlisted companies as the case may be.
(ii)Conversion of ECB into equity may be reported in the form FC-GPR to the Regional
Office concerned of the Reserve Bank as well as in form ECB-2 submitted to Reserve
Bank of India within seven working days from the close of month to which it relates.
Once reported, filing of ECB-2 in the subsequent months is not necessary.
Answer 7(d)
15th June, 2010
Board of Directors
Great India Ltd.
Rights issue as identified in the SEBI (ICDR) Regulations, 2009 is an issue of securities made
by an issuer to its existing shareholder as on a particular date fixed by the issuer (i.e. record
date). A listed company can not make any issue of security through a rights issue where the
aggregate value of securities including premium exceeds Rs.50 lacs, unless it has filed a draft
letter of offer with SEBI through a Merchant Banker at least 30 days prior to the filing of
prospectus with the designated stock exchange.
Requirements for Rights Issue
The issuer is required to comply with various requirements such as –
−issue of securities in dematerialized form
−partly paid-up shares to be made fully paid up
−firm arrangements of fiancé through verifiable means
−pricing guidelines
−composite issue of capital at differential prices
−freedom to determine denomination of shares
−Memorandum of understanding
−Inter se-allocation of responsibilities of Merchant Bankers
−Competence and Appointment of Intermediaries
−further issue of capital, etc.
Major steps involved in Rights Issue
The various steps involved for issue of rights share are enumerated below:
(i)Check whether the rights issue is within the authorized share capital of the company.
If not, steps should be taken to increase the authorized share capital.
(ii)In case of a listed company, notify the stock exchange concerned abount the date of
Board Meeting at which the rights issue is proposed to be considered at least 2 days in
advance of the meeting.
(iii)Rights issue shall be kept open for at least 15 days and not more than 30 days.
(iv)Convene the Board meeting and place before it the proposal for rights issue.
(v)The Board should decide on the matters relating to Quantum of issue proportion of
rights shares.
(vi)Immediately after the Board Meeting notify the concerned Stock Exchanges about
particulars of Board’s decision.
(vii)Forward 6 sets of letter of offer to concerned Stock Exchanges.
(viii)Despatch letters of offer to shareholders by registered post.
(ix)Check that an advertisement giving date of completion of dispatch of letter of offer
has been released in at least an English National Daily, one Hindi National Paper and
a Regional Language Daily where registered office of the issuer company is situated.
(x)Make arrangement with bankers and Self Certified Syndicate Banks for acceptance
of share application forms.
(xi)Prepare a scheme of allotment in consultation with Stock Exchange.
(xii)Convene Board Meeting and make allotment of shares.
(xiii)File return of allotment with Registrar of Companies within 30 days of allotment.
(xiv)Make an application to the Stock Exchange(s) where the company’s shares are
listed for permission of listing of new shares.
Submitted please
Yours faithfully,
XYZ
Company Secretary
Question 8
(a)What are the legal provisions for investor protection with regard to—
(i)misstatements in a prospectus; and
(ii)failure to send financial statements? (5 marks)
(b)Briefly explain the principal documents involved in issuance of global depository
receipts (GDRs) and foreign currency convertible bonds (FCCBs). (5 marks)
(c)Can an issuer company offer specified securities at different prices? What are the
conditions laid down under the SEBI investor protection guidelines with regard to
differential pricing of securities? (5 marks)
(d)What is ‘book building’? What is the difference between ‘fixed price process’ and
‘book building process’? (5 marks)
Answer 8(a)
(i) Mis-statements in Prospectus
Section 63 of the Companies Act, 1956: This Section deals with criminal liability for
misstatement in prospectus issued by a company. For such misstatements, the section
provides for imprisonment upto 2 years and fine which may extend to
Rs. 50,000/- or with both and the offence is compoundable.
Section 68 of the Companies Act, 1956: This section deals with the penalty for
fraudulently inducing persons to invest money in security of a company and provides for
imprisonment upto 5 years or fine upto Rs. 1 lakh.
(ii) Failure to Send Financial Statements
Section 219 of the Companies Act, 1956: This section provides for the right of a member
for copies of Balance-sheet and auditors Report.
Sub-section 3 makes the default in complying with this requirement punishable with fine
which may extend to Rs. 5,000/-.
Besides, Section 621 of the Companies Act, 1956 permits the shareholder to proceed
against the company and its officers in a court of law generally for offences committed under
the Companies Act including prospectus, abridged prospectus, allotment, listing, transfer of
shares, dividend payment etc. committed by the company as well as its officers under various
provisions in the Act.
Answer 8(b)
Principal Documents involved in issuance of GDRs/FCCBs
Depository Agreement
Depository agreement lays down the detailed arrangements entered into by the company
with the Depository, the forms and terms of the depository receipts, rights and duties of the
depository.
Agency Agreement
In terms of this agreement, conversion agents are required to make the principal and
interest payments to the holders of FCCBs from the funds provided by the company.
Subscription Agreement
Subscription agreement provides that Lead Managers and other managers agree,
severally and not jointly, with the company, subject to the satisfaction of certain conditions, to
subscribe for GDRs at the offering price set forth.
Custodian Agreement
Custodian works in co-ordination with the depository and has to observe all obligations
imposed on it including those mentioned in the depository agreement. The custodian is
responsible solely to the depository.
Trust Deed
In respect of FCCBs the company enters into a Covenant (known as Trust Deed) with the
Trustee for the holders of FCCBs, guaranteeing payment of principal and interest amount on
such FCCBs and to comply with the obligations in respect of such FCCBs.
Answer 8(c)
Differential pricing
An issuer can offer specified securities at different prices, subject to the following:
(a)retail individual investors or retail individual shareholders can be offered specified
securities at a price lower than the price at which net offer is made to other categories
of applicants.
However, such difference shall not be more than 10% of the price at which specified
securities are offered to other categories of applicants.
(b)in case of a book built issue, the price of the specified securities offered to an
anchor investor should not be lower than the price offered to other applicants;
(c)in case of a composite issue, the price of the specified securities offered in the
public issue can be different from the price offered in rights issue and justification for
such price difference should be given in the offer document.
Answer 8(d)
Book Building
Book Building means a process undertaken to elicit demand and to assess the price for
determination of the quantum or value of specified securities or Indian Depository Receipts,
as the case may be.
Difference between Fixed Price Process and Book Building Process
Features Fixed Price process Book Building process
Pricing Price at which the Price at which securities will
securities are be offered/allotted is not
offered/allotted is known known in advance to the
in advance to the investor. investor. Only an indicative
price range is known.
Demand Demand for the securities Demand for the securities
offered is known only after offered can be known
the closure of the issue. everyday as the book is built.
Payment Payment is made at the Payment only after allocation
time of subscription
wherein refund is given
after allocation.

Cs Executive JUN2010

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Cs Executive JUN2010

Uploaded by

Copyright:

Available Formats

EXECUTIVE PROGRAMME

GENERAL AND COMMERCIAL LAWS

(vii) Power of Centre to give directions to the States.

(e) Misrepresentation about a material fact to, or suppression of a material fact

Section 33 contains a mandate on certain officials to impound an instrument

Private transactions: Section 4 of the Information Technology Act, practically

(b) For the maintenance of the property itself

(iv) Profit on cancellation of own debentures should be transferred to —

in the balance sheet. Securities premium money is not be used for

General reserve as on 1st April, 2008 1,00,000 60,000

(iii) Phases of generation of intangible assets

Internally generated goodwill should not be recognized as an Intangible Asset.

Unpaid dividend –– 200

The following further details are available :

Balance Sheet of Pioneer Traders Ltd., as at 30th September, 2009

Also ascertain the underwriting commission @ 2.5% payable to each

(ii) Yield value method

Profit available for dividend 1,16,750

(c) Is considered for the inclusion of a part of the year

Earnings per share (EPS) is Rs. 3.075.

(b) Quick Ratio = Liquid Assets/Current Liabilities

(d) Average Collection Period =

difference in current and quick ratio is due to inventory of Rs.4,00,000 out of

(ii) Profitability of the merged plant at 80% capacity utilisation.

(ii) Profitability of the merged plant at 80% capacity

(iii) Sales required to earn a profit of Rs.75 lakh :

Factory Cost 7,00,000

of an appeal order from the commissioner is _________ days.

amount of income assessed or reducing a refund granted to the assessee or in any

included in sundry expenses.

Computation of remuneration allowable to Partners :

(vii) Jewellery 6,00,000

Assessment Year 2009-10 – the year of transfer of the asset.

(ii) In case of other assessees:

specified to be liable for paying service tax in respect of the following

(iv) The amount of the service tax would be :

(ix) Purchase of non-creditable goods.

(a) in the case of minutes of proceedings of a meeting of the Board or of a committee

(b) in the case of minutes of proceedings of a general meeting, by the chairman of

(g) he rescinds the contract of membership on the ground of fraud or

(j) the company is wound up.

Company B is a subsidiary of company A, and company C is a subsidiary of company

LLP Producer Company

1. Membership Suitable for partnership These companies are formed by

Time allowed: 3 hours Maximum marks: 100

Net Asset Value per unit = ROP X (1+Back end load)

You might also like