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No. of pages: 11

Business Level
Business Taxation and Law

Instructions to candidates
(1) Time allowed: Reading and planning – 15 minutes
Writing – 3 hours
(2) Total: 100 marks

K
(3) Answer all questions.
(4) This paper consists of two sections
Section 1 (Business Law) : 5 questions (50 marks)
Section 2 (Business Taxation) : 2 questions (50 marks)
(5) A candidate will not be considered for a Pass in this paper unless the

B
minimum number of marks are obtained in each section.
(6) Answers should be in the English Language, in the answer booklet/s
given to you.
(7) The examination will be conducted as an open book examination and
only the following publications will be permitted to be used at the

3
examination hall:
 Business Law
- Companies Act No. 07 of 2007
 Business Taxation
- Inland Revenue Act No. 24 of 2017
- Value Added Tax Act No. 14 of 2002 and the subsequent
amendments
- Nation Building Tax Act No. 09 of 2009 and the subsequent
amendments
(8) Candidates are allowed to bring permitted publications which are
JUNE 2019
highlighted, sidelined or underlined. Short notes written on the
permitted publications will also be allowed. Page tabs may be used to
refer the pages. Short notes pasted on the permitted publications are
not allowed.
(9) Notes, textbooks (other than permitted publications) or any other
materials will not be allowed. Photocopies/extracts of the above
publications will not be allowed.
(10) Begin each answer on a separate page in the answer booklet. Submit
all workings.
SECTION 1
 SECTION 1
BUSINESS LAW
A minimum score of 25 marks for this section is needed to pass the paper.

All five questions are compulsory.

Total marks for section 1 is 50 marks.
Recommended time for the section is 90 minutes.

Question 01

(a) Godwin (G) is the sole shareholder of Goodwill (Pvt) Ltd (GPL).

G is the owner of a 10 Acre land in Negombo.

GPL has started the business of growing coconut trees on this land, and selling
the coconuts of these trees to the local market.

G and GPL have agreed that these coconut trees will belong to GPL.

Ralph (R) who bought 10,000 coconuts from GPL found out that approximately
90% of these coconuts were spoilt.

R intends to file legal action for damages, but is not sure as to whether he should
file this action against G or GPL.

Required:

Explain to Ralph as to whom he should file this legal action against.

(5 marks)

(b) The shareholders of Haywire (Pvt) Ltd (HPL) wish to remove a director who is
refusing to resign from the board.

The Articles of Association of HPL are the same as the Model Articles in the First
Schedule of the Companies Act No. 07 of 2007.

Required:

Explain to the shareholders the procedure they should follow under the
Companies Act No. 07 of 2007, in order to remove this director.
(5 marks)

(Total: 10 marks)

KB3 – June 2019 Page 2 of 11

Question 02

(a) Siri and Ravi are proposing to incorporate a private limited company under the
name of Sira (Pvt) Ltd.

Required:

Summarise the steps to be followed (including the documents to be filed) to

incorporate this new company.
(7 marks)

(b) Amara is a shareholder of Swasthika (Pvt) Ltd (SPL).

She is unable to locate the copy of the Articles of Association (AOA) of the
company, which was given to her when she requested for it in 2015.

Now she makes a request from the company to issue her with another copy of
the AOA.

Required:

Explain (in relation to the Companies Act No. 07 of 2007) whether the
company can decline to give her a copy of the AOA.

(3 marks)

(Total: 10 marks)

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Question 03

(a) “It is not lawful to issue an application to subscribe for shares of a company,
unless such application is issued with a prospectus”, says Amal.

“But the Companies Act No. 07 of 2007 provides instances where a prospectus is
not required”, says Kamal.

Aruni who did not understand either of these statements, consults you.

Required:

(i) Explain to Aruni what is meant by a prospectus.

(2 marks)

(ii) State three (03) such instances that justify Kamal’s viewpoint.
(3 marks)

(b) The directors of Giving Limited (GL) have proposed to declare a dividend to the
shareholders.

Based on the latest management accounts of GL, and after making allowances for
the proposed dividend declaration, the following accounting information was
given:

 Total assets: Rs. 200 million

 Total liabilities: Rs. 110 million
 Stated capital: Rs. 60 million
 The company’s directors and auditor have confirmed that the company is
able to pay its debts as they become due in the normal course of business.

Required:

(i) State the requirements specified in the Companies Act No. 07 of 2007,
in order to satisfy the solvency test.
(1 mark)

(ii) Explain whether GL is in a position to declare this dividend, in

accordance with the Companies Act No. 07 of 2007.
(4 marks)

(Total: 10 marks)

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Question 04

(a) You are the Company Secretary of Sarupath (Pvt) Ltd (SPL).

The directors of SPL have proposed to declare a dividend of Rs. 5 million, to

existing shareholders, at the annual general meeting (AGM) of the company, to
be held on 10 September 2019 at 10.30 am at Gimanhala Hotel, Colombo 3.

Shareholders are allowed to nominate their proxies to attend and vote on their
behalf at this AGM.

Required:

Prepare the notice and the agenda for this AGM, from the given information.

(You are expected to restrict the items in your agenda to the above
information).
(5 marks)

(b) The following statements were made by Saman, a law student.

(A) “A main difference between a shareholders’ and a creditors’ voluntary

winding up, is the declaration of solvency.”

(B) “Making a declaration of solvency is a must for a creditors’ voluntary

winding up.”

Required:

Explain:
(i) what is a “declaration of solvency” and how it becomes effective.
(2 marks)

(ii) whether each of the above statements are accurate or not.

(3 marks)

(Total: 10 marks)

KB3 – June 2019 Page 5 of 11

Question 05

(a) Mahen (M) is a director of ABC PLC (ABC), a public listed company dealing in
electrical items.

The board of ABC has approved the proposed merger of ABC with the largest
electrical items supplier in Sri Lanka.

This information has still not been made available to the public.

M intends to immediately purchase 10,000 listed shares of ABC before the news
of the proposed merger becomes public.

M is also aware that the Securities and Exchange Commission of Sri Lanka Act
No. 36 of 1987 and its amendments, regulates insider trading.

Required:

Discuss whether M can purchase the 10,000 listed shares of ABC in this
manner, without violating these regulations.
(5 marks)

(b) Loku Appu and Podi Appu have got into a dispute over a commercial agreement.

They have been advised to resolve this dispute through Alternate/Alternative

Dispute Resolution (ADR) methods.

Required:

State five (05) advantages of resolving this dispute through ADR methods.
(5 marks)

(Total: 10 marks)

KB3 – June 2019 Page 6 of 11

 SECTION 2
BUSINESS TAXATION
A minimum score of 25 marks for this section is needed to pass the paper.

All questions are compulsory.

Total marks for section 2 is 50 marks.
Recommended time for the section is 90 minutes.

Question 06

Stella Beach Hotel (Pvt) Ltd (SBH) was incorporated as a subsidiary of Stella Beach
Management (Pvt) Ltd (SBM) in 2012 and operates a hotel business, with the approval
of the Ceylon Tourist Board.

An extract of the income statement of SBH for the year ended 31 March 2019 is as
follows.

Rs. ‘000
Revenue 108,000
Cost of sales (75,200)
Gross profit 32,800
Other income 17,600
Administrative & general expenses (28,400)
Selling & distribution expenses (11,300)
Finance cost (4,800)
Profit before taxation 5,900

An extract of the equity and liability position as at 31 March 2019 is shown below:

Equity & liabilities Rs. ‘000

Stated capital 2,000
Reserves 16,000
Long term loan 80,000

Additional information:

(i) Break up of revenue

Rs. ‘000
Food & accommodation income 74,400
Tourist transport income 24,000
Bar income 21,600
Gross revenue 120,000
Less: Tourism Development Levy (TDL) (12,000)
Net revenue 108,000

KB3 – June 2019 Page 7 of 11

(ii) Break up of other income

Rs. ‘000
Rent income (gross) - Note 1 12,000
Interest income - treasury bills 1,900
Dividend income (net) 3,000
Cash prize awarded by Hotels Corporation identifying SBH 700
as the best hospitality service provider during the year
17,600
Note 1:

 Part of the hotel premises has been given on rent temporally, to a shopping
arcade at a monthly rent of Rs. 240,000, to facilitate tourists, and relevant
withholding tax (WHT) had been deducted by the payer.

 A building recorded under ‘investment property’ had been given on 10 years

lease term at a monthly rent of Rs. 760,000 to operate a ticketing agency, for
which WHT had been deducted.

(iii) Administrative & general expenses include the following.

 Book depreciation of Rs. 6,250,000 and gratuity provision of

Rs. 5,200,000 had been provided.
 During the year Rs. 8,000,000 had been paid as management fees to SBM
for the hotel management services provided by them.
 Rs. 1,800,000 had been incurred on facilities provided in the hotel for the
guest entertainment (music and other) and Rs. 500,000 had been spent
on a tour arranged to entertain the selected team in the catering division.
 Staff training included Rs. 900,000 incurred on a hospitality management
diploma followed by the front office manager.
 Repairs & maintenance expense represent the following.
- Rs. 350,000 had been incurred to paint the ticketing agency building
which was fully depreciated for tax purposes.
- Rs. 480,000 had been incurred for office maintenance.

(iv) Selling & distribution expenses include the following.

 Rs. 1,700,000 had been paid as director’s remuneration to George who is

the director of SBH, and for which WHT had not been deducted by the
company.
 Rs. 360,000 had been incurred during the year for Cutlery, Crockery and
Glassware items, and these items are replaced after every three months
period, as per SBH policy.
 SBH had donated Rs. 1,434,000 to the ministry of tourism.

(v) Finance cost represents Rs. 4,800,000 loan interest made on the bank loan
obtained for working capital requirements.

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(vi) Details of the assets acquired are as follows.

Description Cost
Rs.
Acquired in Acquired in
2018/19 2017/18
Kitchen equipment – Note 2 2,900,000 2,400,000
Motor cars for tourist transport 6,000,000 nil

Note 2: Rs. 1,500,000 worth of kitchen equipment has still not been used by the
company.

Except for the above, all other assets have been depreciated fully for the purpose
of income tax.

(vii) Brought forward tax losses from the previous Y/A were Rs. 2,834,000.

(viii) The company has paid a total of Rs. 200,000 as quarterly instalment of income
tax for Y/A 2018/19 and ESC paid for the Y/A 2018/19 is Rs. 600,000.

Required:

Assess the income tax liability, tax credits and balance tax payable/(refund due) by
SBH for the Y/A 2018/19.

(Total: 25 marks)

KB3 – June 2019 Page 9 of 11

Question 07

(a) “Pretty Woman” is a partnership business carried out by three friends namely,
Meena, Neela and Leela. They operate a beauty salon as a core business activity.
In addition, they also function as an educational institute that offers diploma
courses in beauty culture.

When forming the partnership, they agreed on the following conditions:

 Profits and losses should be shared in the ratio of 2:2:1 among Meena,
Neela, and Leela respectively.
 Meena and Neela are entitled to receive a salary of Rs. 2,000,000 and
Rs. 1,000,000 per annum respectively.

Per the income statement of the partnership for the year ended 31 March 2019,
net profit was Rs. 3,326,000. In arriving at this profit, the following expenses
were deducted.

 Partners’ salaries of Rs. 3,000,000.

 Neela's son, Anil who worked as the administration officer of the
partnership was paid a monthly salary of Rs. 50,000.
 Leela had provided a loan of Rs. 1,000,000 to the partnership and interest
was paid at the rate of 8% per annum.
 The salon was operated in a building owned by Neela, and she was paid a
monthly rent of Rs. 100,000 by the partnership.

During the year, the partnership had received a net dividend of Rs. 172,000 from
listed companies and it had been credited to the income statement.

Required:
(i) Define the term “partnership” per the Inland Revenue Act No. 24 of
2017.
(1 mark)

(ii) Assess the withholding tax payable by the partnership on each

partners’ share for the year of assessment 2018/19.
(8 marks)

KB3 – June 2019 Page 10 of 11

(b) “Pretty Woman” is a registered person for Value Added Tax (VAT) and details of
income earned during the quarter ended 31 March 2019 are given below.

Description Amount (Rs.)

(exclusive of VAT)
Income from salon services 7,200,000
Sale of cosmetics 2,700,000
Income from diploma courses 3,850,000
13,750,000

Details of input tax paid during the quarter ended 31 March 2019 are as follows.

 On import of cosmetics: Rs. 276,000 and on local purchases of cosmetics:

Rs. 145,000. Cosmetics are not used in diploma courses.
 On outsourced transport facility to transport salon employees: Rs. 7,500.
 On common expenses: Rs. 168,000.
The partnership has received a VAT debit note which shows a VAT amount of
Rs. 2,600 from a local supplier of cosmetics. The original tax invoice of that
supply was issued on 20 December 2018.
The partnership has paid a total of Rs. 800,000 as instalments of VAT for the
quarter ended 31 March 2019.

Required:
(i) Calculate the balance VAT payable/(refund due) by the partnership in
respect of the quarter ended 31 March 2019.
(9 marks)
(ii) Calculate the Economic Service Charge (ESC) liability if any for the
quarter ended 31 March 2019.
(2 marks)

(c) SH (Pvt) Ltd is a manufacturing company and its year-end is 31 March. You have
been provided with the following two decisions taken by the board of directors.
(1) Distribute an interim dividend of Rs. 3,000,000 on 10 March 2019. The
company had fully utilised the net dividends received during the year
from one of its subsidiary companies in Sri Lanka for this purpose.
(2) Capitalise part of the profit by way of a bonus share issue in March 2019
amounting to Rs. 2,000,000.

Required:
(i) Compute the WHT to be deducted on the above decisions if any.
(4 marks)
(ii) State the due dates for the payment of WHT to the Department of
Inland Revenue based on the above decisions.
(1 mark)
(Total: 25 marks)
KB3 – June 2019 Page 11 of 11