Copyright Reserved

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
DECEMBER
highlighted, sidelined or underlined. Short notes written on the 2019
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) Mudiyanse Pathirana has no legal disqualifications preventing him from

functioning in the capacity of either a director or a shareholder of a company.

Therefore he wants to incorporate a private limited company in which the sole

shareholder and the sole director would be himself.

Required:

Explain with reference to the provisions of the Companies Act No. 07 of

2007, whether Mudiyanse can incorporate a company in this manner.
(5 marks)

(b) The directors of Macgrill (Pvt) Ltd (MPL) have proposed that the company’s
outgoing auditor Supun and Mahen Associates (SAMA), which is a partnership, is
re-appointed as the external auditor of the company for the year ending
31 March 2020.

Required:

With reference to the provisions of the Companies Act No. 07 of 2007:

(i) Explain whether SAMA can be re-appointed as MPL’s external auditor,

and if so, the manner of re-appointing.
(3 marks)

(ii) State two (02) rights of SAMA as an external auditor.

(2 marks)

(Total: 10 marks)

KB3 – December 2019 Page 2 of 11

Question 02

The promoters of a housing construction company entered into a contract, on behalf of

the company to be incorporated, for the purchase of building materials on credit from
Sandy (S).

Subsequently the company was incorporated and the building materials were used by it.
Up to now, the company has not ratified this contract.

Further S has still not been paid on this contract.

Required:

Explain through the provisions of the Companies Act No. 07 of 2007:

(a) the term ‘pre-incorporation contract’.

(2 marks)

(b) as to who is liable to S on this contract.

(8 marks)

(Total: 10 marks)

KB3 – December 2019 Page 3 of 11

Question 03

(a) At a general meeting of Rotax (Pvt) Ltd, (RPL), a special resolution was passed by
the majority of the shareholders to change the nature of business of RPL.

You are told that this decision amounts to a major transaction under the
Companies Act No. 07 of 2007 (Act).

Now the minority shareholders who voted against this special resolution, do not
wish to remain as shareholders of the company anymore and wish to sell their
shares.

Required:

Explain as per the provisions of the Act:

(i) What a ‘minority buy-out’ right is.

(2 marks)

(ii) Under what ground in this instance, are these minority shareholders
entitled for this ‘minority buy-out’ right.
(1 mark)

(iii) How these shareholders should start the minority buy-out process.

(1 mark)

(b) Duplex (Pvt) Ltd (DPL) was incorporated in June 2018 with ten shareholders.

Each such shareholder holds an equal number of ordinary shares in DPL.

The shareholding of DPL remains the same today.

Now two shareholders intend to file an application in court stating that the
affairs of the company are being conducted in an oppressive manner to them.

Required:

Analyse whether these two shareholders are eligible to file this application in
court.
(6 marks)

(Total: 10 marks)

KB3 – December 2019 Page 4 of 11

Question 04

(a) The following was heard during a discussion on the provisions of the Companies
Act No. 07 of 2007 relating to the periods of notice required for shareholder
meetings of a company.

Sajith: “A minimum of five (05) working days of written notice is required to call
a general meeting for the passing of a special resolution.”

Ajith: “No Sajith, a minimum of ten (10) working days of written notice is
required to call a general meeting for the passing of a special resolution.”

Rajith: “To call an annual general meeting (AGM) of a company, a minimum of

fifteen (15) working days of written notice is required.”

Required:

Explain, with reasons, whether the above statements made by the

participants of the discussion are fully accurate, partly accurate or not
accurate.
(6 marks)

(b) Brighthouse (Pvt) Ltd (BPL) was incorporated in 2017. The present situation of
the company is as follows.

 It has still not commenced its business

 All its directors have resigned

As a result BPL has been informed that it may be wound up by court.

Required:

(i) Identify the grounds under which BPL may be wound up by court in
the given scenario.
(2 marks)

(ii) State two (02) modes of winding up available for a company (other
than the winding up by court).
(2 marks)

(Total: 10 marks)

KB3 – December 2019 Page 5 of 11

Question 05

(a) The regulation of the securities market is very important to a country’s

development.

Required:

(i) State three (03) objectives of regulating the securities market.

(3 marks)

(ii) Explain what is meant by ‘insider trading’.

(2 marks)

(b) Arbitration proceedings under the Arbitration Act No. 11 of 1995 commenced
between Varuna (V) and Mahen (M).

Before the conclusion of the arbitration, the parties to the dispute arrived at a
settlement. This settlement was recorded by V in writing, and signed by both V
and M.

However no arbitral award was made by the arbitrators in terms of the Act.

Subsequently as V did not comply with the settlement, M intends to file an

application at the High Court to enforce this settlement.

Required:

Explain whether M will succeed in his application or not.

(5 marks)

(Total: 10 marks)

KB3 – December 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

Software Today (Pvt) Ltd (ST) is a subsidiary of a large conglomerate in Sri Lanka. It is
in the business of developing software for both local and international clients. The
company was incorporated in 2015 and currently employs 70 software engineers.

Extracts of the financial information of ST for the year ended 31 March 2019 are given
below.

Income statement for the year ended 31 March 2019

Rs. ʽ000
Revenue 310,000
Direct expenses (Note 1) (130,700)
Gross profit 179,300
Other income (Note 2) 3,570
Administrative expenses (Note 3) (126,567)
Service and distribution expenses (9,364)
Profit from operations 46,939
Finance costs (Note 4) (1,631)
Profit before tax 45,308

Equity and liability position as at 31 March 2019

Rs. ʽ000
Stated capital 1,000
Reserves 875
Loans 3,500
Lease creditors 4,500

KB3 – December 2019 Page 7 of 11

(i) Note 1: Direct expenses

An extract of direct expenses is given below.

Rs. ʽ000
Direct wages 109,260
EPF 9,808
ETF 2,452
Local expenses 628
Foreign travel expenses 4,023
Meal expenses 2,523
Training expenses 1,105
Research and development 901
130,700

 ST has included the salaries paid to software engineers as direct wages. The total
of this amount has been considered when calculating their PAYE deduction.
 Foreign travel expenses relate to business promotion and other client related
matters overseas.
 Training expenses include training provided to employees on updating their
knowledge relevant to the business. The company also sponsored 5 students,
whose parents are employees of ST, to complete a diploma course in network
security. The cost of this, which was Rs. 650,000, was included under training
expenses. ST has not considered this amount for PAYE purposes for the relevant
employees.
 ST has paid a research institution to carry out a research on the computer
literacy skills of undergraduates in Sri Lanka.
 Meal expenses include meals and refreshments provided to all the employees.
This benefit was not considered for PAYE purposes as it was administratively
impractical to allocate to the individual employees.

(ii) Note 2: Other income

Rs. ʽ000
Interest income (gross) 427
Rent income (gross) 1,500
Dividend income (net) 540
Profit on sale of computer equipment 743
Gain on disposal of shares 360
3,570

 Interest income was earned from fixed deposits at commercial banks.

Withholding tax has been deducted on such interest income and paid to the
Inland Revenue Department.
 ST has given 600 square feet of its office space for rent to a foreign company to
carry out marketing activities in Sri Lanka. The withholding tax on the rent was
withheld when making the payment and paid to the Inland Revenue Department.
 ST has disposed of some shares during the year and the details are given below.
KB3 – December 2019 Page 8 of 11
 Name of Status No. of Date of Cost of SaleMarket value
the shares purchase purchase proceeds
per share as
company (Rs.) (Rs.)
at 30.09.2017
(Rs.)
Marsil Private 100,000 01.04.2016 1,000,000 1,250,000 11.50
(Pvt) Ltd limited
company
Suriya Listed 5,600 01.10.2017 694,400 804,400 130.00
PLC company
(iii) Note 3: Administrative expenses included the following.
 Accounting depreciation amounting to Rs. 5,340,000.
 Rs. 1,477,000 of office entertainment expenses.
 Donation made to a temple of Rs. 50,000.
 Rent paid for the office premises amounting to Rs. 19,600,000 for the Y/A. ST
has not withheld tax on rent payments made in the first 3 months of the Y/A
amounting to Rs. 4,900,000.
 Gratuity provision for the Y/A amounting to Rs. 4,670,000. Gratuity paid to
employees during the Y/A amounts to Rs. 1,700,000.
 A debtor balance of Rs. 2,700,000 was written off. This amount was deemed
irrecoverable as ST has taken many steps to recover the debt and believes
that the debt will not be recovered.
(iv) Note 4: Finance costs consisted of the following.
 Interest charge of Rs. 881,000 on a bank loan obtained to finance the working
capital requirements of the company.
 The lease interest on the lease obtained during the Y/A amounting to
Rs. 750,000.
(v) Property, plant and equipment
 During the Y/A, the company purchased 40 computers for its employees at a
total cost of Rs. 5,600,000. A lease was obtained for 3 years to purchase the
computers and the monthly lease rental amounts to Rs. 185,000.
 ST has disposed of 35 computers at a total price of Rs. 1,200,000, which were
bought by the company at a total cost of Rs. 2,800,000 in December 2015.
 All the assets other than the assets mentioned above were fully depreciated
for tax purposes.
(vi) Taxes paid for the Y/A 2018/19
 Quarterly installments paid for the Y/A 2018/19 were Rs. 250,000.
 ESC payments brought forward from the Y/A 2017/18 were Rs. 113,000.
 ESC payments made for the Y/A 2018/19 were Rs. 1,550,000.
 Relevant capital gains tax has been paid to the Inland Revenue Department
on the due dates.
Required:
Assess the gross income tax liability, tax credits and balance tax
payable/(refund due) of ST for the Y/A 2018/19.
(Total: 25 marks)

KB3 – December 2019 Page 9 of 11

Question 07
(a) HMS Partners (HMS) is a partnership formed by two brothers: Amal and Nimal.
They are engaged in the business of import and supply of air conditioners (ACs),
generators and computers. In addition, they also provide services such as AC
installations, computer networking and repair services.

There is no written partnership agreement for the partnership business.

However, the partners have mutually agreed to share profits or losses equally
between them.

Per the financial statements for the year ended 31 March 2019, the net profit for
the partnership was Rs. 18,250,000 after adjusting the following expenses and
income.
(i) Partners’ monthly salary: Rs. 120,000 for Amal and Rs. 130,000 for Nimal.
(ii) In addition to the salary drawn, Amal received Rs. 2,000,000 as a special
service fee, calculated as a percentage of turnover, for his technical
know-how and industry knowledge.
(iii) Bookkeeping activities of the partnership is handled by Nimal’s wife at a
monthly salary of Rs. 60,000. This was recorded under office staff salaries.
(iv) During the Y/A, HMS received Rs. 1,200,000 of interest income (gross)
from its fixed deposits. Withholding tax relating to this has been deducted
by the bank and paid to the Inland Revenue Department.

Required:

(i) Assess the withholding tax payable by the partnership for the
allocation of profit for the Y/A 2018/19.
(4 marks)
(ii) Calculate the share of profit and other income assessable to each
partner for the Y/A 2018/19.
(4 marks)

(b) HMS is a VAT registered person. During the quarter ended 31 March 2019, the
following income was earned.

Turnover (exclusive of VAT) Rs.

Sale of air conditioners (ACs) 6,500,000
Sale of generators 3,800,000
Sale of computers 2,200,000
Income from AC installations, computer networking 1,800,000
and repair services
Total 14,300,000

 Input tax paid at the point of customs for importation was Rs. 110,000.
 During the quarter, certain computer networking jobs were
subcontracted to another VAT registered person and Rs. 180,000 was
paid as input VAT.

KB3 – December 2019 Page 10 of 11

  Input tax paid for clearing and transporting computers from the port was
Rs. 30,000.
 Input tax on the rent paid for the office and showroom premises for the
quarter was Rs. 240,000.
 Installment payments made was Rs. 1,150,000.

Required:

Calculate the balance VAT payable/(refund due) by/to HMS for the quarter
ended 31 March 2019.

(10 marks)

(c) Amal’s friend Kamal a fellow member of the Association of Accounting

Technicians of Sri Lanka (AAT), started an accounting firm called KP Associates
last year. Amal handed over the assignment of attesting the accuracy of accounts
of the partnership (HMS) to KP Associates for the Y/A 2018/19 at an agreed fee.

Required:

(i) List two (02) persons who can accept such an assignment per the
provisions of the Inland Revenue Act No. 24 of 2017.
(2 marks)

(ii) Explain whether KP Associates can accept the assignment.

(2 marks)

(d) Amal is planning to transfer a plot of land in Gampaha to his eldest son as a gift, at
a deed value of Rs. 1,200,000.

Required:

Compute the applicable stamp duty, and state to whom it is payable.

(3 marks)

(Total: 25 marks)

KB3 – December 2019 Page 11 of 11