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No. of pages: 11

Business Level
Business Taxation and Law

Instructions to candidates

K
(1) Time allowed: Reading and planning – 15 minutes
Writing – 3 hours
(2) Total: 100 marks
(3) Answer all questions.

B
(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
minimum number of marks are obtained in each section.

3
(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
examination hall:
 Business Law
- Companies Act No. 07 of 2007
 Business Taxation JUNE 2015
- 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
highlighted, sidelined or underlined. Short notes written on the
permitted publications will also be allowed. Page tabs may be used to
refer the pages.
(9) Notes, text books (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
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) Charity (Pvt) Limited (CPL) is a company incorporated in Sri Lanka and it has a
widespread distribution network in Sri Lanka.

The controlling shareholder of CPL is Mr. Crooks.

Mr. Crooks was a notorious drug trafficker in the recent past, and has even served a
prison sentence.

Mr. Ratne, who has been following the movements of Mr. Crooks for some time, has
reasonable evidence to suggest that Mr. Crooks has devised plans to spread the use
of drugs in Sri Lanka through this distribution network of CPL.

Therefore Mr. Ratne, wishes to make a petition to the courts to stop Mr. Crooks from
using this distribution network of CPL to spread drugs in Sri Lanka.

Required:
Discuss the possibility of Mr. Ratne succeeding in his petition to a court of law,
and the possibility of the court lifting the veil of incorporation of CPL in this
instance.

[Support your answer with reference to decided cases, where relevant.]

(6 marks)

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(b)
Daughters & Sons (Pvt) Limited (D&S) is a company involved in manufacturing
cement based products.

Bear Brothers (Pvt) Limited (BBL), another company, entered into a contract with
D&S, for the purchase of cement based products, under a supplier contract.

The supplier contract contained the following dispute resolution clause:

“In the event of a dispute relating to this contract, a party to that dispute shall be
entitled to serve a notice invoking this clause and make reference of such matters to a
sole arbitrator.

The arbitration proceedings shall be held in the English language and under the laws
of Sri Lanka”.

A dispute has arisen between the parties to the contract, with BBL claiming that D&S
has supplied products of an inferior quality.

As a result, BBL is now claiming damages from D&S for the breach of the contract.

Required:
Explain:
- The nature of the above dispute resolution clause, and,
- Whether BBL could initiate legal action in a court of law, for the recovery
of damages from D&S in relation to this dispute.
(4 marks)

(Total: 10 marks)

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Question 02

Senevi, the promoter of Lawsuit (Pvt) Limited (LPL), entered into a contract with his friend
Cyril, prior to the incorporation of LPL, to purchase Cyril’s rubber factory on behalf of LPL.
(You may assume that this contract is not a major transaction, in relation to LPL.)
Subsequently the company (LPL) was incorporated.
The articles of association (AOA) of LPL, are in line with the Model Articles given in the
First Schedule to the Companies Act No. 07 of 2007, except that they contain an Object
Clause.
The Object Clause states that LPL can engage in any line of business relating to the tea
industry.
After seeing the AOA of LPL, Cyril panics. He is now doubtful whether LPL can ratify this
contract.

Required:
Discuss whether the contract to purchase the rubber factory from Cyril, can be ratified
by LPL.
(Total: 10 marks)

Question 03
Shera, a first time shareholder of Captain Cool (Pvt) Limited, holds jointly with her husband
600 ordinary shares with voting rights of the company.

The total number of ordinary shares with voting rights, issued by the company was 10,000.
These shares are the only class of shares issued by the company.

Further, Shera is also a first time debenture holder of another company, Sizzling Hot (Pvt)
Limited.

Shera is of the view that the affairs of Captain Cool (Pvt) Limited are being conducted in a
manner which is oppressive to the minority shareholders, including herself.
Required:
(a) Analyse five (05) differences between an ordinary shareholder with voting rights
and a debenture holder.
(5 marks)
(b) Advise Shera whether she, as a shareholder, can make an application to a court of
law, seeking relief against the alleged oppressive conduct of business by Captain
Cool (Pvt) Limited.
(5 marks)
(Total: 10 marks)

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Question 04

You were appointed by Zombi (Pvt) Limited (ZPL), as its Company Secretary on
1 April 2015.

On 29 April 2015, you were told that ZPL has scheduled its Annual General Meeting (AGM)
for 2014/15, for Saturday the 9th of May 2015, at 9.00 am at No. 1, Sleepy Lane,
Creepytown.

The board of directors of ZPL have instructed you to present the following for the approval
of the shareholders at this AGM:

- Minutes of the last AGM held on 25 July 2014

- Audited accounts as at 31 March 2015
- Proposal to declare a dividend of Rs. 5 per share
- Appointment of the auditors for the financial year 2015/16.

The proxy form was to be attached to the notice, and the duly filed proxies were to be
received at the registered office of the company on or before 7 May 2015.

On 9 May 2015, at the AGM, Oggie, a proxy holder for the main shareholder of the company,
raised a query on the legality of the length of the notice calling this AGM.

You may assume that the articles of association of ZPL are in line with the Model Articles
given in the First Schedule of the Companies Act, No. 07 of 2007.

Required:

(a) Prepare the Notice for this AGM (inclusive of the agenda), on behalf of the board
of directors of the company, that you as the Company Secretary would have
prepared on 29 April 2015, upon being entrusted with this task.
(8 marks)

(b) Explain the answer that you as the Company Secretary would have given, with
respect to the query posed by Oggie, in order to ensure that the AGM was held as
scheduled.
(2 marks)

(Total: 10 marks)

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Question 05

Cars-4-All PLC, is a public listed company trading on the Colombo Stock Exchange (CSE),
and is engaged in the business of importing hybrid motor vehicles. Due to the recent tax
changes made by the government, Cars-4-All is faced with grave financial problems.

Cars-4-All, has confirmed in writing to Ruthless, a creditor, that it owes Rs. 4,000,000 and
that at the moment it is unable to settle this amount due to its financial problems.

Ruthless has sent a letter of demand to Cars-4-All, in this regard.

Two (2) weeks have passed from the date of this letter of demand, but Cars-4-All has not
yet settled the dues to Ruthless.

Now Ruthless wants to file action in a court of law, to get the company wound up and in the
process get his dues settled.

Sneeky, the auditor of the company, who is presently engaged in the performance of the
annual audit of the company, has got to know about this financial crisis faced by the
company as well as this letter of demand.

Immediately Sneeky passes on this information to his brother, Quicky, who owns 30% of
the total shareholding of Cars-4-All.

The very next day, prior to the audit report being released by Sneeky, Quicky sells his 30%
shareholding of the company through the Colombo Stock Exchange.

Subsequently, upon the release of the audit report to the public, the market value of the
shares of the company dropped drastically.

Required:

(a) Explain to Ruthless whether he can file action in a court of law immediately, in
order to wind up Cars-4-All by court and thereby recover his dues.
(5 marks)

(b) Explain to Quicky, based on the principle of “insider trading”, whether he has
violated the law, by the sale of his 30% shareholding in the company.

(5 marks)
(Total: 10 marks)

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 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

Lucky Biscuit Manufacturers (Pvt) Limited (LBM), a company incorporated in Sri Lanka in
1994, is engaged in manufacturing and selling of biscuits for the local market. It is a
subsidiary of Lucky Confectioneries PLC. The commercial operation of LBM commenced on
1 June 1994. As at 31 March 2015, stated capital and total reserves of the company were
Rs. 30,000,000 and Rs. 4,600,000 respectively.

The holding company has provided loan capital to LBM and the total loans taken by LBM as
at 31 March 2015 were Rs. 184,000,000. Management of LBM has been outsourced to the
holding company and the holding company charges management fees for the management
services it provides. The management fee paid by LBM is more than the statutory allowable
amount under the provisions of the Inland Revenue Act. Therefore, the company made an
application to the Commissioner General of Inland Revenue requesting full relief for the
amount paid under the management agreement. The Commissioner General, having
considered all the circumstances of the case, has allowed only 60% of the management fee
to be deductible under section 26(1)(r)(ii) of the Inland Revenue Act.

LBM is also looking for opportunities to market their product abroad and the management
of the company is trying their best to commence their export in 2016. During the year of
assessment 2014/15, a business team including the managing director and marketing
director has been sent to Europe for negotiations with prospective buyers.

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(i) Extract of the income statement for the year ended 31 March 2015

Rs. ‘000
Revenue 346,000
Cost of sales (228,040)
Gross profit 117,960
Other income 7,070
Selling and distribution expenses (12,584)
Administrative expenses (20,236)
Finance costs (10,130)
Profit before tax 82,080

(ii) Summary of other income

Rs. ‘000
Dividends - net 540
Interest from government securities 270
Fixed deposit interest - net 360
Rent received - gross 2,400
Profit from sale of a lorry 3,500

(iii) Details of property, plant and equipment

Rs. ‘000
Opening balance as at 1 April 2014 (at cost) 543,272
Add: cost of additions 30,000
Less: cost of the asset disposed (3,800)
Closing balance as at 31 March 2015 (at cost) 569,472

 The addition made during the year is a factory building. It was a building used for
manufacturing of chocolates by the previous owner. The purchase price does not
include any Value Added Tax (VAT).

 The allowance for depreciation has already been granted on the assets in the
opening balance, except on the office building which was constructed in year
2013 for Rs. 15,000,000. One half of the building is used for the business and the
other half has been given on rent. Monthly rent is Rs. 200,000. Total depreciation
charged to the income statement during the year of assessment is Rs. 3,000,000
where Rs. 2,000,000 relates to the factory building purchased during this year.

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  The asset disposed during the year of assessment is a motor lorry which was
purchased during the year of assessment 2007/08 for Rs. 3,800,000. The
company has provided depreciation at a rate of 25%.

(iv) Administrative expenses include the following:

 The total contributions made to the Employees Provident Fund, Employees Trust
Fund and Gratuity fund were Rs. 12,257,000. These funds have been approved by
the Commissioner General for the purpose of taxation. Total salaries and wages for
the year of assessment was Rs. 42,120,000 and part of this amount has been
charged to cost of sales.

 Cost of air tickets purchased for the business team was Rs. 354,000. Statutory
income of the trade for the year of assessment 2013/14 was Rs. 16,900,000.

 Rent paid for the year of assessment by LBM to a landlord in respect of a residence
provided to the managing director was Rs. 900,000. The rating assessment of the
residence is Rs. 200,000 and the rates payable is at 20% of its rating assessment.
The total employment income of the managing director under section 4(1)(a) is
Rs. 4,800,000.

 Management fee paid to the holding company as per the management agreement
was Rs. 7,234,000.

(v) Selling and distribution expenses include the following:

 The total advertising cost was Rs. 830,000. Out of that, Rs. 300,000 has been spent
on the construction of a sales outlet.

 Entertainment expenses were Rs. 658,000, and it was an amount spent to entertain
customers who had come for business negotiations.

 Ground rent paid was Rs. 430,000.

 Cash donation made to an approved charity which maintains sick and needy
people in the institution itself was Rs. 125,000.

(vi) Finance costs include the following:

 Loan interest paid to the holding company was Rs. 9,400,000.

(vii) All other expenses of the business are allowed for income tax purposes.

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(viii) Tax on dividend was paid at the rate of 10% on the distribution made within 18
months from the commencement of the year of assessment 2014/15, and such tax
was Rs. 500,000. This distribution was made on 1 December 2014, and it is entirely
made of the relevant part of the aggregate amount of gross dividend.

(ix) The company has paid Rs. 5,800,000 as quarterly income tax self-assessment
payments.

Required:

(a) Assess the gross income tax liability, tax credits and balance tax payable/
(refund due) by/to the company for the year of assessment 2014/15.
(20 marks)
(b) Compute the quantum of minimum dividends to be distributed to avoid tax on
distributable profit before 30 September of 2015 and deemed dividend tax payable
thereon, if any.
(5 marks)
(Total: 25 marks)

Question 07

“Aruna Brothers” is a partnership business carried out by two brothers, Aruna and Varuna,
sharing profits and losses equally. They are engaged in the manufacture of coconut
scraping machines for the domestic market. However, part of the products was sold to an
exporter who exports them to India. The partnership is registered for both Value Added
Tax (VAT) and Simplified Value Added Tax (SVAT).

The machines are driven by electricity. Aruna owns the patent in respect of the machines
and therefore the partnership pays him royalties by reference to the invoice value of
machines sold. The business premises are owned by Varuna and the partnership pays him
a rent of Rs. 50,000 per month. Rates and the cost of repairs to the premises are borne by
the partnership.

Both partners participate in the day to day running of the business and each of them draws
a monthly salary of Rs. 100,000. The wife of Aruna, who works as the accountant, is also
paid a salary of Rs. 100,000 a month.

The eldest brother of the two partners was also a partner until his death on 15 August
2011. From the date of his death, the partnership has been paying an annuity of Rs. 50,000
per month to his wife in terms of a duly executed deed of annuity.

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The turnover of the business for the year ended 31 March 2015 was Rs. 45,000,000. The
draft accounts of the business for the same period disclosed a net profit of Rs. 3,000,000
after deducting the following expenses:

Rs.
Depreciation on lathe machines purchased during the previous 300,000
year of assessment for Rs. 3,000,000
Salaries paid to the two partners 2,400,000
Salary paid to Aruna’s wife 1,200,000
Annuity paid to the wife of the deceased partner 600,000
Rent paid to Varuna 600,000
Royalties paid to Aruna 1,800,000

Interest received from a commercial bank, on account of a fixed deposit held by the
partnership, amounts to Rs. 180,000. Withholding tax at 10% has been deducted in respect
of the interest.

During the last quarter of operation, the partnership made taxable supplies at the standard
rate amounting to Rs. 6,000,000 and suspended VAT supplies amounting to Rs. 3,000,000.

The partnership has imported raw materials from India and has paid VAT amounting to
Rs. 120,000 to the Director General of Customs on 20 March 2015. Input VAT paid for the
taxable period 01/01/2015 to 31/03/2015 on the purchase of items from the domestic
market amounts to Rs. 80,000. The excess input tax brought forward from the previous
taxable period amounts to Rs. 120,000.

Required:

(a) Assess the divisible profit of the partnership, partnership tax payable on the
divisible profit, and the distribution of profits among the partners for the year of
assessment 2014/15.
(10 marks)
(b) Advise Aruna Brothers whether it has to provide audited statement of accounts
together with the partnership income tax return in respect of the business for the
period concerned.
(5 marks)
(c) Calculate the VAT liability of the partnership in respect of the quarter ended
31 March 2015.
(5 marks)
(d) Advise on the criteria the partnership is required to fulfill in order to register as a
Registered Identified Purchaser (RIP) under the SVAT.
(5 marks)
(Total: 25 marks)

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