MODULE I - ICSIthat the authority should engage in performing government functions (Electricity Board, Rajasthan v. Mohanlal, AIR 1967 SC 1957). The Calcutta High Court has held that

GUIDELINE ANSWERS

EXECUTIVE PROGRAMME

DECEMBER 2011

MODULE I

GUIDELINE ANSWERS

EXECUTIVE PROGRAMME

DECEMBER 2011

MODULE I

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(1) (2) (3)

December 2008 & All questions The Income tax, Wealth tax, and ServiceJune 2011 Tax are subject to changes by the Annual

Finance Acts. In order to update all theanswers, the students are advised to referto the latest law keeping in mind thefollowing amendments/changes, for June2012 examination.

(i) All changes made by the FinanceAct, 2011 relevant to AssessmentYear 2012 - 13 or before for DirectTaxes and Indirect Taxes.

(ii) All the circulars, clarifications/notifications issued by the CBDT/CBEC/Central Government whichbecame effective on or before sixmonths prior to the date of therespective examination.

(iii) The levy of Gift tax has beensuspended w.e.f. 1st October, 1998 byinsertion of clause (3) to Section 3 ofGift tax Act, 1958 by Finance (No. 2)Act, 1998. Therefore, Gift Tax Act hasbeen excluded from the scope ofexamination unless otherwiseinformed.

The questions based on case laws, inconflict with the latest law be treatedas of academic interest only.

(i)

EXECUTIVE PROGRAMME

NOTE : Guideline Answers of the last Six Sessions need to be updated in the light ofchanges & references given below :

1 EP–GCL– December 2011

EXECUTIVE PROGRAMME EXAMINATION

DECEMBER 2011

GENERAL AND COMMERCIAL LAWS

Time allowed : 3 hours Maximum marks : 100

NOTE : Answer SIX questions including Question No. 1 which is COMPULSORY.

1

Question 1

(a) “Article 21 of the Constitution of India has been so transformed by thejudiciary that it now encompasses all conceivable rights within its ambit.”Discuss. (8 marks)

(b) What do you understand by the expression ‘State’ under Part-III of theConstitution of India ? Explain with the help of decided case law on thepoint. (6 marks)

(c) Explain ‘delegated legislation’. State the circumstances in which delegatedlegislation is possible. (6 marks)

Answer 1(a)

Article 21 of the Indian Constitution confers on every person the fundamental rightto life and personal liberty. It says that “no person shall be deprived of his life or personalliberty except according to procedure established by law”. Thus, Article 21 seeks toprevent encroachment upon personal liberty by the Executive except in accordance withlaw and in conformity with the provisions of law. Prior to Menaka Gandhi v. Union ofIndia, AIR 1978 SC 597, Article 21 was understood to guarantee the right to life andpersonal liberty to citizens only against the arbitrary action of the executive and notagainst legislative action. The State could interfere with the liberty of the citizens if itcould support its action by a valid law. But after Menaka Gandhi’s decision, Article 21now protects the right to life and personal liberty of citizens from legislative action alsoon certain grounds.

“Personal Liberty” under Article 21 means freedom from physical restraint to personsby incarceration or otherwise. It also includes all the varieties of rights which togethermake up a man’s personal liberties other than those which are already included in thevarious clauses of Article 19. In A.K. Gopalan v. State of Madras, AIR 1950 SC 27, anarrow meaning was given to the expression “personal liberty” confining it to the libertyof the person, i.e. of the body of a person. This restricted interpretation of the expression“personal liberty” preferred by the majority in A.K. Gopalan’s case namely, that theexpression “personal liberty” means only liberty relating to or concerning the person orbody of the individual, has not been accepted by the Supreme Court in later cases. Theexpression “personal liberty” is not limited to bodily restraint or to confinement to prisononly, is well illustrated in Kharak Singh v. State of U.P., AIR 1983 SC 1295.

It was reiterated in Maneka Gandhi v. Union of India, AIR 1978 SC 597, that personalliberty within the meaning of Article 21 includes within its ambit the right to go abroadand no person can be deprived of this right except according to procedure prescribed bylaw.

EP–GCL– December 2011 2

In Reliance Petrochemicals Ltd. v. Proprietors of Indian Express AIR 1989 SC 190,the Supreme Court read into Article 21 the right to know. The Supreme Court held thatright to know is a necessary ingredient of participatory democracy.

Procedure established by law : The expression “procedure established by law” meansprocedure laid down by statute or prescribed by law of the State.

Following Maneka Gandhi's case, the Supreme Court has widened the ambit ofArticle 21 in many of its decisions as for example, solitary confinement is inhuman(Sunil Batra v. Delhi Administration, AIR 1980 SC 1579); right to speedy trial is includedin Article 21 (Hussainara Khatoon v. Home Secretary Bihar, AIR 1979 SC 1369); detenu’sright to have interviews with his lawyers and family members is included in Article 21(Francis Coralie Mullin v. The Administrator, U.T. of Delhi, AIR 1981 SC 746); right tofree legal service is included in Article 21 (Superintendent & Remembrancer of LegalAffairs, West Bengal v. S. Bhowmick, AIR 1981 SC 917); non payment of minimumwages is violation of Article 21 (People’s Union For Democratic v. Union Of India &Others, AIR 1982 SC 1473 (also known as Asiad Project Workers’ case); right toeducation is included in Article 21 (Unni Krishnan v. State of Andhra Pradesh, AIR 1993SC 2178); Article 21 includes the right to information (Reliance Petrochemicals Ltd. v.Proprietors of Indian Express, AIR 1989 SC 190); the right to life enshrined in Article 21includes the right of enjoyment of pollution free water and air (Subhash Kumar v. Stateof Bihar, AIR 1991 SC 420) etc. Thus, Article 21 as interpreted to encompass numerousfacets of the human personality go far beyond the narrow concept of physical liberty.

Answer 1(b)

The expression ‘State’ under the Constitution of India

Under Article 12 of the Constitution of India the expression “State” includes—

(a) The Government and Parliament of India;

(b) The Government and the Legislature of each of the States; and

(c) All local or other authorities:

(i) Within the territory of India; or

(ii) Under the control of the Government of India.

The expression ‘local authorities’ refers to authorities like Municipalities, DistrictBoards, Panchayats, Improvement Trusts, Port Trusts and Mining Settlement Boards.The Supreme Court has held that ‘other authorities’ will include all authorities created bythe Constitution or statute on whom powers are conferred by law and it is not necessarythat the authority should engage in performing government functions (Electricity Board,Rajasthan v. Mohanlal, AIR 1967 SC 1957). The Calcutta High Court has held that theelectricity authorities being State within the meaning of Article 12, their action can bejudicially reviewed by this Court under Article 226 of the Constitution of India. (In re:Angur Bala Parui, AIR 1999 Cal. 102). It has also been held that a university is anauthority (University of Madras v. Shanta Bai, AIR 1954 Mad. 67). The Gujarat HighCourt has held that the President is “State” when making an order under Article 359 ofthe Constitution (Haroobhai v. State of Gujarat, AIR 1967, Guj. 229). The words “underthe control of the Government of India” bring, into the definition of State, not only every


authority within the territory of India, but also those functioning outside, provided suchauthorities are under the control of the Government of India. In Bidi Supply Co. v. Unionof India, AIR 1956 SC 479, State was interpreted to include its Income-tax department.

The Supreme Court in Sukhdev Singh v. Bhagatram, AIR 1975 SC 1331 and in R.D.Shetty v. International Airports Authority, AIR 1979 SC 1628, has pointed out thatcorporations acting as instrumentality or agency of government would become State asthey are subjected to the same limitations in the field of constitutional or administrativelaw as the government itself.

In Pradeep Kumar Biswas v. Indian Institute of Chemical Biology, (2002) 5 SCC111, a seven Judge Bench of the Supreme Court by a majority of 5:2 held that CSIR isan instrumentality of “the State” falling within the scope of Article 12. The multiple testwhich is to be applied to ascertain the character of a body as falling within Article 12 oroutside is to ascertain the nature of financial, functional and administrative control of theState over it and whether it is dominated by the State Government and the control canbe said to be so deep and pervasive so as to satisfy the court “of brooding presence ofthe Government” on the activities of the body concerned.

In Zee Telefilms Ltd. v. Union of India, (2005) 4 SCC 649, the Supreme Courtapplying the tests laid down in Pardeep Kumar Biswas case held that the Board ofControl for cricket in India (BCCI) was not State for purposes of Article 12 because itwas not shown to be financially, functionally or administratively dominated by or underthe control of the Government and control exercised by the Government was not pervasivebut merely regulatory in nature.

Judiciary although an organ of State like the executive and the legislature, is notspecifically mentioned in Article 12. However, the position is that where the Court performsjudicial functions, e.g. determination of scope of fundamental rights vis-a-vis legislatureor executive action, it will not occasion the infringement of fundamental rights and thereforeit will not come under ‘State’ in such situation (A.R. Antualay v. R.S. Nayak, (1988) 2SCC 602). While in exercise of non-judicial functions e.g. in exercise of rule-makingpowers, where a Court makes rules which contravene the fundamental rights of citizens,the same could be challenged treating the Court as ‘State’.

Answer 1(c)

Delegated Legislation

Delegated legislation may be defined as “rules of law making under the authority ofan Act of Parliament”. Although laws are to be made by legislature, the legislature bystatute may delegate its powers to other body or persons. Such statute is known as theenabling Act and lays down the broad principles and leaves the detailed rules to beprovided by regulations made by a Minister or other body of persons. Delegated legislationexists in the form of rules, regulations, orders and bye laws.

The system of delegated legislation has become very popular because it has theadvantage of flexibility, elasticity, expedition and opportunity for experimentation.

The increasing complexity of modern administration and the need for flexibility capableof rapid readjustment to meet changing circumstances which cannot always be foreseen,in implementing socio-economic policies pursuant to the establishment of a welfare


state as contemplated by the Constitution, have made it necessary for the legislaturesto delegate its powers. Further, the Parliamentary procedure and discussions in gettingthrough a legislative measure in the Legislatures is usually time consuming.

The three relevant justifications for delegated legislation are:

(i) The limits of the time of the legislature;

(ii) The limits of the amplitude of the legislature, not merely its lack of competencebut also its sheer inability to act in many situations, where direction is wanted;and

(iii) The need of some weapon for coping with situations created by emergency.

The delegation of the legislative power is what Hughus, Chief Justice called, flexibilityand practicability (Currin v. Wallace 83 L. ed. 441).

Question 2

Comment on any four of the following :

(i) “Where once time has begun to run, no subsequent disability or inabilityto institute a suit or make an application can stop it.”

(ii) “Heydon’s rule is not always operative in interpretation of statutes.”

(iii) “A contract may not always be specifically enforceable.”

(iv) “Conciliation is an informal process in which the conciliator (the thirdparty) tries to bring the disputants to agreement.”

(v) “An instrument admitted in evidence is not to be questioned.”(4 marks each)

Answer 2(i)

According to Section 9 of the Limitation Act 1963, where once time has begun torun, no subsequent disability or inability to institute a suit or make an application canstop it provided that where letters of administration to the estate of a creditor have beengranted to his debtor, the running of the period of limitation for a suit to recover debt shallbe suspended while the administration continues.

The Section is based on the general principal that once a right to sue has accruedand time has started running, it could not stop unless there was some direct obstructionto the remedy itself, or unless the case fell within some of the exceptions provided in theLimitation Act. The statute of Limitation Act is a self-contained statute and no equitableconsideration can be imported in it, apart from the provisions made therein.

The rule of this Section is based on the English dictum. “Time when once it hascommenced to run in any case will not cease to be so by reason of any subsequentevent”. The applicability of this Section is limited to suits and applications only and doesnot apply to appeals unless the case fell within any of the exceptions provided in the Actitself.

For the applicability of Section 9 it is essential that the cause of action or the rightto move the application must continue to exist and subsisting on the date on which a


particular application is made. If a right itself had been taken away by some subsequentevent, no question of bar of limitation will arise as the starting point of limitation forthatparticular application will be deemed not to have been commenced.

It may be pointed out that Section 9 refers only to subsequent disability or inabilityto sue or make an application. It has nothing to do with a case where execution hasbeen stayed by an order. The time during which the execution cannot go on because ofan order resulting in the stay of execution is expressly excluded by Section 15(1) of theLimitation Act.

Answer 2(ii)

When the material words in a statute are capable of bearing two or more constructions,one of the most firmly established rule of construction of such words is the rule laiddown in the Heydon’s case which has attained the status of a classic. The rule directsthat the Courts must adopt that construction which “shall suppress the mischief andadvance the remedy”.

The Supreme Court in Commr. of Income-tax M.P. Bhopal v. Sodra Devi, AIR 1957SC 832, stated that the rule in Heydon’s case is applicable only when the words inquestion are ambiguous and are reasonably capable of more than one meaning.

It was further held that in applying the rule in Heydon’s case, it is important toremember that the recourse to the object and policy of a statute or the consideration ofthe mischief and defect which the statute purports to remedy is only permissible whenthe language is capable of two constructions.

The correct principle is that after the words have been construed in their context andit is found that the language is capable of bearing only one construction, the rule inHeydon’s case ceases to be controlling and gives way to the plain-meaning rule.

Answer 2(iii)

Section 14 of the Specific Relief Act, 1963 lays down the contracts which cannot bespecifically enforced. They are : (i) a contract for the non-performance of whichcompensation in money is an adequate relief; (ii) a contract which runs into such minuteand numerous details that the court cannot enforce specific performance of its materialterms or which is dependant upon the personal qualification or volition of the parties or acontract from its nature is such that the court cannot enforce specific performance;(iii) a contract which is in its nature determinable; (iv) a contract, the performance ofwhich involves the performance of a continuous duty which the court cannot supervise.

The very foundation of specific performance of a contract is that an award for damagesdoes not afford the aggrieved party a complete remedy. If in the opinion of the Courtdamages will be an adequate remedy, specific performance of the contract cannot bedecreed [Ramji Patel v. Rao Kishore, (1929) P.C. 190].

In such a case pecuniary compensation is equated with the specific performance ofthe contract. It can be decreed only when the remedy at law is not adequate or isdefective. The court may come to the conclusion that the ends of justice will be servedbetter by awarding the damages instead of the specific performance of the contract.


Answer 2(iv)

Conciliation is a facilitative process in which disputing parties engage a neutral thirdparty who acts as a Conciliator in their dispute. The Conciliator brings the parties to thedispute to an agreement by lowering tensions, improving communications, interpretingissues, providing technical assistance, exploring potential solutions and bringing abouta negotiated settlement. Conciliation brings about harmony and resolves conflict keepingin tact cordial relationship between the parties.

The Conciliator assists the parties in an independent and impartial manner in theirattempt to reach an amicable settlement of their dispute. He is guided by the principlesof objectivity, fairness and justice, giving consideration to, among other things, therights and obligations of the parties, usages of the trade concerned and the circumstancessurrounding the dispute, including any previous business practices between the parties.

Answer 2(v)

Section 36 of the Indian Stamp Act, 1899 exempts an instrument admitted in evidencefrom being questioned. It provides that where an instrument has been admitted in evidence,such an admission shall not (except as provided in Section 61) be called in question atany stage of the same suit or proceeding on the ground that the instrument has not beenduly stamped.

If notwithstanding any objection, the trial court admits the document, the matterends there and the court cannot subsequently order the deficiency to be made and levypenalty. (Bhupathi Nath v. Basanta Kumar, AIR 1936 Cal. 556; AIR 1933 Lah. 240.

Question 3

Distinguish between any four of the following :

(i) ‘Decree’ and ‘order’.

(ii) ‘Facts in issue’ and ‘issues of fact’.

(iii) ‘Movable property’ and ‘immovable property’.

(iv) ‘Sale’ and ‘exchange’.

(v) ‘Computer’ and ‘computer system’. (4 marks each)

Answer 3(i)

‘Decree’ and ‘Order’

Distinction between decree and order is as under :

(i) Decree is the formal expression of an adjudication which conclusively determinesthe rights of the parties with regard to all or any of the matters in controversy inthe suit. An order is the formal expression of any decision of a Civil Court.

(ii) Decree originates from a suit instituted by presenting a plaint; an order may notoriginate through a suit.

(iii) Decree may be either preliminary or final, no such distinction of orders.

(iv) Every decree is appealable, but every order is not.


(v) Second appeal lies in High Court, no second appeal lies in case of an ordereven if it is appealable.

Answer 3(ii)

‘Facts in issue’ and ‘issues of fact’

According to Section 3 of the Indian Evidence Act, 1872, the expression "facts inissue" means and includes-any fact from which, either by itself or in connection withother facts, the existence, non-existence, nature or extent of any right, liability, ordisability, asserted or denied in any suit or proceedings, necessarily follows.

Whenever, under the provisions of the law for the time being in force relating to CivilProcedure, any Court records an "issue of fact", the fact to be asserted or denied in theanswer to such issue is a "fact in issue".

A "fact in issue" is called as the principal fact to be proved or factum probandumand the relevant fact the evidentiary fact or factum probans from which the principal factfollows. The fact which constitute the right or liability called “fact in issue” and in aparticular case the question of determining the “facts in issue” depends upon the rule ofthe substantive law which defines the rights and liabilities claimed.

Under Civil Procedure Code, the Court has to frame issues on all disputed factswhich are necessary in the case. These are called "issues of fact" but the subjectmatter of an issue of fact is always a "fact in issue". Thus when described in the contextof Civil Procedure Code, it is an "issue of fact" and when described in the language ofEvidence Act it is a "fact in issue".

Answer 3(iii)

‘Movable property’ and ‘Immovable property’

The Transfer of Property Act, 1882 does not define the term ‘moveable property’.However, it has been defined in the General Clauses Act, 1897 as to mean “property ofevery description except immoveable property”. The Registration Act, 1908 defines‘moveable property’ to mean and include property of every description excludingimmoveable property but including standing timber, growing crops and grass.

The term ‘immoveable property’ is also not defined under the Transfer of PropertyAct, 1882. However, it is defined in the negative sense as “the immoveable propertydoes not include standing timber, growing crops, or grass.” Standing timber are trees fitfor use for building or repairing houses. This is an exception to the general rule that treesare immovable property. Growing crops include all vegetable growth which have noexistence apart from their produce such as pan leaves, sugarcane etc.

General clauses Act defines the term “immovable property” but not exhaustively. Itstates “immovable property shall include land, benefits arising out of land and thingsattached to earth or permanently fastened to something that is attached to earth. TheIndian Registration Act expressly includes under immovable property, the benefits arisingout of land, hereditary allowances, right of way, lights, ferries and fisheries.

Taken from these definitions together the meaning of Immoveable property wouldbe land, benefit to arise out of land such as rent, and things attached to the earth or


permanently fastened so something that is attached to earth like trees and buildings butnot standing timber, growing crops and grass. The last three things are regarded asseverable from the land on which they stand and, therefore, they are not included in theterm "immoveable property".

Answer 3(iv)

‘Sale’ and ‘Exchange’

Under Section 54 of the Transfer of Property Act, 1882 "Sale" has been defined asa transfer of ownership in exchange for a price paid or promised or part paid and part-promised.

As per Section 118 of the Transfer of Property Act, 1882, when two persons mutuallytransfer the ownership of one thing for the ownership of another, neither thing or boththings being money only, the transaction is called an "Exchange". A transfer of propertyin completion of an exchange can be made only in manner provided for the transfer ofsuch property by sale.

The difference between a "Sale" and an "Exchange" is that in a sale the price is paidin money while in an "Exchange" it is paid in another property by way of barter. "Sale" isalways for a price, which means money or the current coin of the realm while no price ispaid in an exchange, there being only a transfer of one specific property for another. Andin a transaction of exchange, although payment of price may be made in addition to thetransfer of property, by way of equality of exchange, such payment does not make theexchange lose its character as such. A transaction of sale must be made in considerationfor a price paid or promised or part paid and part promised. Also, there must be presenta money consideration in case of sale. If the consideration is not money but some othervaluable consideration, then the transaction may be an exchange or barter but not asale.

Answer 3(v)

‘Computer’ and ‘Computer System’

As per section 2(1) (i) of the Information Technology Act, 2000, “computer” meansany electronic, magnetic, optical or other high-speed data processing device or systemwhich performs logical, arithmetic, and memory functions, by manipulations of electronic,magnetic or optical impulses, and includes all input, output, processing, storage, computersoftware, or communication facilities which are connected or related to the computer ina computer system or computer network.

As per Section 2 (1) (l) of the Act “computer system” means a device or collection ofdevices, including input and output support devices and excluding calculators which arenot programmable and capable of being used in conjunction with external files, whichcontain computer programmes, electronic instructions, input data, and output data, thatperforms logic, arithmetic, data storage and retrieval, communication control and otherfunctions.

Question 4

Attempt any four of the following :

(i) State the instruments which are chargeable with duty under the Indian StampAct, 1899.


(ii) Mention the documents which are not required to be registered compulsorilyunder the Registration Act, 1908.

(iii) “Law of limitation bars the remedy, but does not extinguish the right.”Explain the statement with its exceptions.

(iv) State the effects of ‘acknowledgement’ and ‘payment against debt’ on the periodof limitation.

(v) Discuss briefly the right of redemption. (4 marks each)

Answer 4(i)

Instruments chargeable with duty

Instruments chargeable with duty have been stipulated under Section 3 of the IndianStamp Act, 1899. It provides that subject to the provisions of the Act and the exemptionscontained in Schedule I, the following instruments shall be chargeable with a duty of theamount indicated in that Schedule as the proper duty therefor, namely:

(a) every instrument mentioned in that Schedule which, not having been previouslyexecuted by any person, is executed in India on or after the first day of July,1899;

(b) every bill of exchange payable otherwise than on demand or promissory notedrawn or made out of India on or after the date and accepted or paid, or presentedfor acceptance or payment, or endorsed, transferred or otherwise negotiated inIndia; and

(c) every instrument (other than a bill of exchange or promissory note) mentioned inthat Schedule, which, not having been previously executed by any person, isexecuted out of India on or after that day and relates to any property situate, orto any matter or thing done or to be done in India and is received in India.

Answer 4(ii)

Documents which are not required to be registered compulsorily

Section 18 of the Registration Act, 1908 specifies the documents of which registrationis not compulsory but optional. They are as follows:

(1) Instruments, (other than instruments of gift and will) which purport or operate tocreate, declare, assign, limit or extinguish, whether in present or in future, anyright, title or interest, vested or contingent, of value less than Rs.100/- to or inimmovable property;

(2) Instrument acknowledging the receipt or payment of any consideration on accountof the creation, declaration, assignment, limitations or extinction of any suchright, title or interest;

(3) Leases of immovable property for any term not exceeding one year;

(4) Instruments transferring or assigning any decree or order of a court or awardwhen they purport or operate to create, declare, assign, limit or extinguish,whether in present or in future, any right, title or interest of a value less than onehundred rupees, to or in immovable property;


(5) Instruments (other than will) which create, declare, assign, limit or extinguishany right, title or interest to or in movable property;

(6) Wills; and

(7) Other documents not required to be registered under section 17.

Answer 4(iii)

The principle upon which the law of limitation is based is vigilantibus non dormientibusleges subvenient, i.e., the law aids the diligent and not the indolent. It thus helps andpromotes vigilance and alertness in exercise of rights and frowns upon inordinate laches.If a man has been negligently sleeping over his rights for an undue length of time, lawdoes not allow him to litigate in respect of those rights.

The law of limitation only bars the remedy by way of a suit, i.e., if the period oflimitation expires, the party entitled to file the suit for enforcement of a right is debarredfrom doing so. However, his original right on which the suit was to be based is notbarred. Where the limitation period of any suit, appeal or application expires, then thesuffered person is prevented to seek the remedy through the court of law, but the rightremains intact. For example the limitation period to recover a debt is 3 years. After theexpiration of 3 years, the creditor is prevented to recover the debt through the court oflaw by filing a suit but the right to recover the debt through other means is not extinguished.Therefore, if a claim is settled outside the court after expiry of limitation period that isnot illegal.

The law of limitation does not either create or extinguish rights. Its intention is not togive a right where there is none (nor to extinguish a right where there is none) but tointerpose a bar after a certain period to a suit to enforce an existing right.

The Limitation Act, 1963 makes specific provisions for exclusion of certain time insome cases for computation of the prescribed period of limitation. These provisions areas under:

1. Exclusion of time in legal proceedings (section 12).

2. Exclusion of time during which leave to sue or appeal as a pauper is applied for(Section 13).

3. Exclusion of time bona fide taken in a court without jurisdiction (Section 14).

4. Exclusion of time in certain other cases (Section 15, 16 17).

Answer 4(iv)

Effect of 'acknowledgement' and 'payment against debt' on the period of limitation

Section 18 of the Limitation Act, 1963 deals with the effect of acknowledgement ofliability in respect of property or right on the period of limitation. The following requirementsshould be present for a valid acknowledgement as per Section 18 :

1. There must be an admission or acknowledgement;

2. Such acknowledgement must be in respect of any property or right;


3. It must be made before the expiry of period of limitation; and

4. It must be in writing and signed by the party against whom such property or rightis claimed.

If all the above requirements are satisfied, a fresh period of limitation shall becomputed from the time when the acknowledgement was signed.

As per Section 19 of the Act where payment on account of a debt or of interest on alegacy is made before the expiration of the prescribed period by the person liable to paythe debt or legacy or by his agent duly authorised in this behalf, a fresh period of limitationshall be computed from the time when the payment was made. The proviso says that,save in the case of payment of interest made before the 1st day of January, 1928 anacknowledgement of the payment must appear in the handwriting of, or in a writingsigned by the person making the payment.

According to the explanation appended to this Section:

(a) Where mortgaged land is in the possession of the mortgagee, the receipt of therent or produce of such land shall be deemed to be a payment;

(b) ‘Debt’ does not include money payable under a decree or order of a court for thepurpose of this Section.

Thus, according to this section a fresh period of limitation becomes available to thecreditor from the date of part payment when part-payment of debt is made by the debtorbefore the expiration of the period of limitation.

Answer 4(v)

Right of redemption

The first and the most important right of the mortgagor is the right to redeem i.e.,take back the mortgaged property by paying the mortgage money at any time after thestipulated date for repayment. Section 60 of the Transfer of Property Act, 1882 providesthat any time after the principal amount has become due; the mortgagor has a right toredeem the property. Although the Act gives him the right to redeem any time after theirdebt has become due, it enjoins upon the mortgagor the obligation to exercise this right(i) before the right is extinguished by the Act of parties or by a decree of Court, or(ii) before it is barred by the Limitation Act. According to the Law of Limitation, themortgagor can redeem the property within 60 years after the money has become due.This right to redeem the property even after the time of payment has elapsed is calledthe Right or Equity or Redemption. But the mortgagor is not entitled to redeem beforethe mortgage money becomes due on the date fixed for repayment of the loan. His rightto redeem arises only when mortgage money becomes due and not before.

For example, A borrows money on a mortgage and agrees to pay it back after 5years. A has won a lottery and wants to pay the loan at the end of 3 years and redeemhis property. He cannot do so, because the right to redeem arises only when the moneyhas become due at the end of 5 years. This is so because the mortgagee cannot file asuit against the mortgagor for the repayment of the loan. That is why it is said that therights of the mortgagor and the mortgagee are co-extensive.


Question 5

(a) Re-write the following sentences after filling-in the blank spaces withappropriate word(s)/figure(s) :

(i) A ‘reference’ may be made by the subordinate court to _________under the provisions of the Code of Civil Procedure, 1908.

(ii) Cyber Appellate Tribunal is to be presided over by a person who isor has been qualified to be a _________.

(iii) An application for obtaining information under the Right to InformationAct, 2005 is to be submitted to _________.

(iv) In the interpretation of statutes, where the rule applies that thegeneral words following the particular or specific words, such rule iscalled _________.

(v) A person liable for the torts committed by other person is called_________ under the law of torts.

(vi) A document executed outside India is not valid unless it is _________.

(vii) Whoever commits ‘hacking’ shall be punished with _________.

(viii) Digital signature is recognised as a valid method of _________.

(1 mark each)

(b) Write the most appropriate answer from the given options in respect of thefollowing :

(i) The definition of ‘legal representative’ under the Code of Civil Procedure,1908 means —

(a) A person who represents the deceased

(b) A person who represents in law the estate of the deceased

(c) A person who intermeddles with the estate of the deceased

(d) Both (b) and (c) above.

(ii) The mortgagee has the right to sell out the mortgaged propertywithout intervention of the court in the —

(a) English mortgage

(b) Usufructuary mortgage

(c) Mortgage by conditional sale

(d) Simple mortgage.

(iii) The Right to Information Act, 2005 confers on all citizens a right toreceive information. This is now a —

(a) Legal right

(b) Constitutional right

(c) Fundamental right

(d) Human right.


(iv) The conciliation proceedings shall be terminated —

(a) By signing of the settlement agreement by the parties

(b) By a written declaration of the conciliator

(c) By a written declaration of the parties for termination

(d) All the above.

(v) Where warrant remains unexecuted, the Code of Criminal Procedure,1973 provides the remedy(ies) of —

(a) Issuing a proclamation

(b) Attachment and sale of property

(c) Sale of the property

(d) Both (a) and (b) above.

(vi) Any magistrate of the first class and of the second class is speciallyempowered to take cognizance of an offence upon —

(a) His own knowledge that such offence has been committed

(b) Receiving a complaint of facts constituting such offence

(c) Information received from a police officer


(vii) Certain categories of information have been exempted from disclosureunder the Right to Information Act, 2005 —

(a) Where the disclosure prejudicially affects the sovereignty and integrityof India

(b) Where disclosure would cause a breach of privilege of theParliament or the State Legislature

(c) Information received in confidence from foreign government

(d) All the above.

(viii) Appointment of an arbitral tribunal under section 11 of the Arbitrationand Conciliation Act, 1996 has to be made by an agreement betweenthe parties within —

(a) 30 Days

(b) 45 Days

(c) 60 Days

(d) None of the above. (1 mark each)

Answer 5(a)

(i) A ‘reference’ may be made by the subordinate court to High Court underthe provisions of the Code of Civil Procedure, 1908.

(ii) Cyber Appellate Tribunal is to be presided over by a person who is orhas been qualified to be a High Court Judge or a member of IndianLegal Service who has held a post in Grade I of the service for atleast 3 years.


(iii) An application for obtaining information under the Right to Information Act,2005 is to be submitted to Public Information Officer (PIO) .

(iv) In the interpretation of statutes, where the rule applies that the generalwords following the particular or specific words, such rule is called Ruleof Ejusdem Generis.

(v) A person liable for the torts committed by other person is calledVicarious Liability under the law of torts.

(vi) A document executed outside India is not valid unless it is Registeredin India.

(vii) Whoever commits ‘hacking’ shall be punished with Imprisonment uptothree years or fine which may extend to Rs. 2 lakh or with both.

(viii) Digital signature is recognised as a valid method of Authentication.

Answer 5(b)(i)

(d) Both (b) and (c) above

Answer 5(b)(ii)

(a) English Mortgage

Answer 5(b)(iii)

(a) Legal Right

Answer 5(b)(iv)

(d) All the above

Answer 5(b)(v)


Answer 5(b)(vi)

(d) Both (a) and (b) above

Answer 5(b)(vii)

(d) All the above

Answer 5(b)(viii)

(a) 30 days.

Question 6

(a) Explain strict or absolute liability under the law of torts. (6 marks)

(b) What do you understand by ‘Public Information Officer’ (PIO) under the Rightto Information Act, 2005 ? What are the duties of PIO under the saidAct ? (5 marks)

(c) Discuss the remedies available to a person who has been refused toregister a document by a sub-registrar. Can registration of documentsbe refused on the ground of under-valuation of stamp duty ? (5 marks)


Answer 6(a)

Strict or absolute liability under the law of torts

In some torts, the defendant is liable even though the harm to the plaintiff occurredwithout intention or negligence on the defendant’s part. In other words, the defendant isheld liable without fault. These cases fall under the following categories:

(i) Liability for Inevitable Accident – Such liability arises in cases where damage isdone by the escape of dangerous substances brought or kept by anyone uponhis land. Such cases are where a man is made by law an insurer of otheragainst the result of his activities.

(ii) Liability for Inevitable Mistake – Such cases are where a person interferes withthe property or reputation of another.

(iii) Vicarious Liability for Wrongs committed by others – Responsibility in suchcases is imputed by law on grounds of social policy or expediency. Thesecases involve liability of master for the acts of his servant.

The rule of strict liability was laid down in Rylands v. Flethcer (1868) L.R. 3 H.L.330. As per this rule is that a man acts at his peril and is the insurer of the safety of hisneighbour against accidental harm. Such duty is absolute because it is independent ofnegligence on the part of the defendant or his servants.

Later in the case of Read v. Lyons [(1946) 2 All. E.R. 471 (H.L.)], it has beenexplained that two conditions are necessary in order to apply the rule in Ryland v.Fletcher, these are:

(i) Escape : from a place of which the defendant has occupation or over which hehas a control to a place which is outside his occupation or control or somethinglikely to do mischief if it escapes; and

(ii) Non-natural use of Land : The defendant is liable if he makes a non-natural useof land.

If either of these conditions is absent, the rule of strict liability will not apply.

Exceptions to the Rule of Strict Liability

The following exceptions to the rule of strict liability have been introduced in courseof time, some of them being inherent in the judgment itself in Ryland v. Fletcher:

(i) Damage due to Natural Use of the Land : Water collected in the reservoir inlarge quantity, was held to be non-natural use of land.

(ii) Consent of the plaintiff : Where the plaintiff has consented to the accumulationof the dangerous thing on the defendant’s land, the liability under the above ruledoes not arise.

(iii) Act of Third Party : If the harm has been caused due to the act of a stranger,who is neither defendant’s servant nor agent nor the defendant has any controlover him, the defendant will not be liable.


(iv) Statutory Authority : Public bodies storing water, gas, electricity and the like areby statute, exempted from liability so long as they have taken reasonable care.

(v) Act of God : If an escape is caused, through natural causes and without humanintervention, then there is then said to exist the defence of Act of God.

(vi) Escape due to plaintiff’s own Default : Damage by escape due to the plaintiff’sown default was considered to be good defence.

Answer 6(b)

Public Information Officer (PIO) and his duties under the Right to Information Act,2005

As per Section 5 of the Right to Information Act, 2005 every public authority hasto—

(i) Designate in all administrative units or offices Central or State Public InformationOfficers to provide information to persons who have made a request for theinformation.

(ii) Designate at each sub-divisional level or sub-district level Central Assistant orState Assistant Public Information Officers to receive the applications forinformation or appeals for forwarding the same to the Central or State PublicInformation Officers.

The PIO deals with requests from persons seeking information and where the requestcannot be made in writing, to render reasonable assistance to the person to reduce thesame in writing. (Section 5 and 6).

If the information requested for is held by or its subject matter is closely connectedwith the function of another public authority, the PIO shall transfer, within 5 days, therequest to that other public authority and inform the applicant immediately. [Section 6(3)]

PIO may seek the assistance of any other officer for the proper discharge of his/herduties. [Section 5 (4)]

As per section 7, the PIO, on receipt of a request, shall as expeditiously as possible,and in any case within 30 days of the receipt of the request, either provide the informationon payment of such fee as may be prescribed or reject the request for any of thereasons specified. Where the information requested for concerns the life or liberty of aperson, the same shall be provided within forty-eight hours of the receipt of the request.If the PIO fails to give decision on the request within the period specified, he shall bedeemed to have refused the request. Where a request has been rejected, the PIO shallcommunicate to the requester - (i) the reasons for such rejection, (ii) the period withinwhich an appeal against such rejection may be preferred, and (iii) the particulars of theAppellate Authority.

PIO shall provide information in the form in which it is sought unless it woulddisproportionately divert the resources of the Public Authority or would be detrimental tothe safety or preservation of the record in question. [Section 7 (9)]

If allowing partial access, the PIO shall give a notice to the applicant. If informationsought has been supplied by third party or is treated as confidential by that third party,


the PIO shall give a written notice to the third party within 5 days from the receipt of therequest. (Section 10 and 11)

Answer 6(c)

According to Section 72(1) of the Registration Act, 1908 an appeal shall lie againstan order of a Sub-Registrar refusing to admit a document to registration (whether theregistration of such document is compulsory or optional) to the Registrar to whom suchSub-Registrar is subordinate, if presented to such Registrar within thirty days from thedate of the order; and the Registrar may reverse or alter such order. This does not applywhere the refusal is on the ground of denial of execution.

If the order of the Registrar directs the document to be registered and the documentis duly presented for registration within thirty days after the making of such order, theSub-Registrar shall obey the same, and thereupon shall, so far as may be practicable,follow the procedure prescribed in Sections 58, 59 and 60; and such registration shalltake effect as if the document had been registered when it was first duly presented forregistration. [Section 72(2)]

Registration cannot be refused on the ground of under-valuation for stamp or anyother extraneous reason. [Mulla (1998), page 308]

Question 7

State, with reasons in brief, whether the following statements are true or false:

(i) ‘Actionable claim’ as defined in the Transfer of Property Act, 1882 is aproperty and transferable.

(ii) The provisions relating to ‘fundamental rights’ given in the Constitution ofIndia are subject to amendment.

(iii) Arbitration is the means by which the parties to a dispute get the samesettled through the intervention of a third person.

(iv) The limitation for taking cognizance of certain offences has been prescribedby the Code of Criminal Procedure, 1973.

(v) Where a suit is pending in the jurisdictional civil court, a fresh suit cannotbe proceeded with on the same cause of action between the same partiesin another court in India.

(vi) Questions arising between the parties and the representatives relating toexecution, satisfaction and discharge of the decree will be decided by theexecuting court.

(vii) Any person who is aggrieved by a decision of the Public InformationOfficer (PIO) may file an appeal under the Right to Information Act, 2005.

(viii) Under the provisions of the Code of Criminal Procedure, 1973, themagistrate is empowered to issue search warrant for searching a document,parcel or other things in the custody of the postal or telegraph authority.

(2 marks each)Answer 7

(i) True : According to Section 3 of the Transfer of Property Act, 1882, actionableclaim includes all kinds of unsecured debts and beneficial interest in movable


property which is not in the possession of claimant. Actionable claim can betransferred by execution of an instrument in writing signed by the transferor orhis duly authorized agent.

(ii) True : In Kesavananda Bharti v. State of Kerala (AIR 1973 SCC 225), the SupremeCourt upheld the validity of 24th Constitutional Amendment holding that parliamentcan amend any part of the Constitution including Fundamental Rights. But thecourt made it clear that parliament cannot alter the basic structure of frameworkof the constitution.

(iii) True : Arbitration is the means by which parties to a dispute get the samesettled through the intervention of a third person but without recourse to a courtof law. Parties by agreement appoint the Arbitrator who settles their disputeoutside the court. The parties repose confidence in the judgement of Arbitratorand show their willingness to accept the decision.

(iv) True : Chapter XXXVI (Section 467 to 473) of the Code of Criminal Procedure,1973 prescribes limitation period for taking cognizance of certain offences.Except as otherwise provided in the Code, no court shall take cognizance of anoffence after expiry of the period of limitation mentioned below:

(a) Six months, if the offence is punishable with fine only,

(b) One year if offence punishment with imprisonment for a term not exceedingone year; and

(c) Three years, if offence punishable with imprisonment for a term exceedingone year but not exceeding three years;

(v) True : Section 10 of the Code of Civil Procedure, 1908 deals with the doctrine ofres sub judice. It provides that the Civil Court shall stay the proceeding of anysuit if the cause of action of such suit is directly and substantially same to theformer suit which is pending in the same court or other competent court, betweenthe same parties, litigating under the same title and the former court where thesuit is pending, is competent to provide the remedy claimed in the present suit.

(vi) True : Section 47 of the Code of Civil Procedure, 1908 provides that questionsrelating to execution, satisfaction and discharge of the decree arising betweenthe parties or their legal representative will be decided by the executing courtand not by separate suit. Thus under this section, the executing court isempowered to decide all kinds of the matters relating to execution of the decree.

(vii) True : As per Section 19 of the Right to Information Act, 2005, any aggrievedperson may file first appeal to the officer who is senior in rank to the PublicInformation Officer (PIO) in the concerned public authority within 30 days fromthe expiry of prescribed time limit. Delay may be condoned if sufficient causeis shown. Second appeal lies to the Central Information Commission or theState Information Commission, as the case may be, within 90 days of the dateon which decision is given; delay may be condoned on sufficient cause, ifshown.

(viii) False : As per Section 93 of the Code of Criminal Procedure, 1973, searchwarrant shall not be issued for searching a document, parcel or other thing in the


custody of the postal or telegraph authority, by a magistrate other than a DistrictMagistrate or Chief Judicial Magistrate.

Question 8

(a) A confession made by an accused on the faith of a promise made by thepolice officer making the investigation that he would get off if he madea disclosure of the offence committed by him or would get pardon. Whethersuch a confession made by the accused is admissible in evidence ? Answerciting the relevant provisions of law. (6 marks)

(b) Arun, a Hindu, who has separated from his father Bharat, sells three fieldsX, Y and Z to Chandan representing that Arun is authorised to transferthe same. Of these fields, Field-Z does not belong to Arun, which wasretained by Bharat during partition. On the death of Bharat, Arun obtainsthe possession of Field-Z. What are the rights of Chandan now ? (5 marks)

(c) Amit is the resident of Jaipur and Babita is of Delhi. The marriage betweentwo was solemnised at Ajmer. Both Amit, husband and Babita, wife livedtogether at Udaipur. Amit treated his wife Babita with cruelty. Babita, thewife comes to you as an advocate to file a suit against Amit for divorceon the ground of ‘cruelty’. Advise Babita, in which court Babita has theright to file the suit. Decide citing the relevant provisions of law.

(5 marks)Answer 8(a)

The problem pertains to Section 24 of the Indian Evidence Act, 1872. According toSection 24 of the Act a confession can only be admitted if it is made voluntarily. However,if confession is obtained by inducement, threat or promise held out by a person inauthority, it is not be admitted in evidence. The inducement must be proceeded fromthe person in authority.

In the present problem, the police officer making the enquiry induces the accused toget off the offence if he makes confession and consequently, the accused makes theconfession and hence it comes within the purview of this section. Therefore, the confessionmade by the accused is inadmissible.

Answer 8(b)

The given problem is an illustration appended to Section 43 of Transfer of PropertyAct, 1882.

Section 43 of Transfer of Property Act lays down the doctrine of feeding the grant byestoppel. As per this doctrine where a person fraudulently or erroneously represents thathe is authorized to transfer certain immovable property or proposes to transfer suchproperty for consideration, such transfer shall, at the option of transferee operate on anyinterest which the transferor may acquire in such property at any time during which thecontract of transfer subsists.

Thus, where a grantor has purported to grant an interest in land which he did not atthat time possess, but subsequently acquires, the benefit of his subsequent acquisitiongoes automatically to the earlier grantee or as it usually expressed, feeds the estoppel.Thus Chandan, not having rescinded the contract of sale may require Arun to deliverfield Z to him.


Answer 8(c)

Section 20 of the Code of Civil Procedure, 1908 lays down the provisions relating tojurisdiction of the civil courts.

Section 20 provides that subject to the limitations provided by Section 15 to 19, anyother suit may be instituted in any court in whose jurisdiction (a) the defendant, at thetime of the commencement of the suit, actually and voluntarily resides or personallyworks for gain or carries on business; or (b) the cause of action arises wholly or in part.

In the given problem, Babita is filing a suit for cruelty. As is evident from the factsof the case, both Amit and Babita after their marriage at Ajmer stayed together ashusband and wife at Udaipur. It is obvious that the offence of cruelty is committed atUdaipur itself where both of them stayed together.

In the light of the legal provisions cited above as well as in view of the factualposition of the case, the cause of action has arisen at Udaipur. So, Babita can file thesuit for divorce in the court at Udaipur.

21 EP–CACMA–December 2011

COMPANY ACCOUNTSCOST AND MANAGEMENT ACCOUNTING


NOTE : All working notes should be shown distinctly.

PART A(Answer Question No. 1 which is compulsory

and any two of the rest from this part)Question 1

21

(a) State, with reasons in brief, whether the following statements are true orfalse :

(i) The term ‘distributable profits’ means profits which would otherwise beavailable for dividends.

(ii) The logic behind the creation of the capital redemption reserve is tomaintain the capital structure of the company intact after redemption.

(iii) Underwriting commission and brokerage both cannot be provided to anyindividual underwriter.

(iv) A debenture issued at a discount cannot be redeemed at a premium.

(v) International Accounting Standard-1 deals with valuation of inventories.(2 marks each)

(b) Write the most appropriate answer from the given options in respect of thefollowing :

(i) The balance of sinking fund account is transferred to –

(a) Share capital account

(b) General reserve account

(c) Profit and loss account

(d) Sinking fund investment account.

(ii) When interest on own debentures becomes due, it will be credited to–

(a) Profit and loss account

(b) Own debentures account

(c) Debenture interest account

(d) Interest on own debentures account.

(iii) Expenses incidental to the creation and floatation of a company arecalled –

(a) Underwriting expenses

(b) Preliminary expenses

(c) Trade expenses

(d) Establishment expenses.

EP–CACMA–December 2011 22

(iv) The item ‘unpaid dividend’ appears in the balance sheet of a companyunder the heading –(a) Current assets, loans and advances(b) Reserves and surplus(c) Secured loans(d) Current liabilities and provisions.

(v) Premium on issue of shares can be used for ––(a) Issue of bonus shares(b) Distribution of profit(c) Meeting loss on sale of a fixed asset(d) None of the above. (1 mark each)

(c) Re-write the following sentences after filling-in the blank spaces withappropriate word(s)/figure(s) :(i) Shares forfeited account is to be shown in the balance sheet by way

of to the paid-up share capital on the liabilities sideuntil the concerned shares are re-issued.

(ii) International Accounting Standards (IAS)/International Financial ReportingStandards (IFRS) are issued by the .

(iii) Unless loss prior to incorporation is completely written off, it must beshown as an asset in the assets side of the balance sheet under theheading .

(iv) According to section 209(4A) of the Companies Act, 1956, a companymust preserve its books of account and its relevant vouchers for aminimum period of .

(v) A company cannot issue redeemable preference shares for a periodexceeding . (1 mark each)

Answer 1(a)

(i) True : Profits which are available legally for distribution of dividends are calleddistributable profits. The term dividend refers to that part of the profits of a companywhich is distributed by the company among its shareholders. In other words,dividend is nothing but the distribution of divisible or distributable profits of acompany among its shareholders.

(ii) True : The most important purpose for the creation of capital redemption reserveis to maintain the capital intact. The capital structure of the company will remainunaffected even after the redemption of redeemable preference shares. It isbecause capital redemption reserve can be used only for issue of bonus shares;otherwise its amount has to be kept intact.

(iii) False : Underwriting commission may be paid in addition to brokerage.Underwriting commission is the consideration payable to the underwriters forunderwriting the issue of shares or debentures of a company. Whereas brokerageis paid to the brokers who try to procure subscriptions to the shares or debenturesissued but they do not take any responsibility of subscribing to the shares ordebentures of the company.


(iv) False : The debentures issued at a discount can be redeemed at a premium. Theloss to be recognized at the time of the issue of such debentures will be equal tothe total of the amount of discount on issue and the amount of premium onredemption.

(v) False : International Accounting Standard 1 deals with the Presentation of FinancialStatements. The standard prescribes the minimum structure and content of thebasic financial statements.

Answer 1(b)(i)(b) General Reserve Account

Answer 1(b)(ii)(d) Interest on Own Debentures account

Answer 1(b)(iii)(b) Preliminary Expenses

Answer 1(b)(iv)(d) Current Liabilities and Provisions

Answer 1(b)(v)(a) Issue of bonus shares

Answer 1(c)

(i) Shares forfeited account is to be shown in the balance sheet by way ofaddition to the paid-up share capital on the liabilities side until theconcerned shares are re-issued.

(ii) International Accounting Standards (IAS)/International Financial ReportingStandards (IFRS) are issued by the International Accounting StandardsBoard.

(iii) Unless loss prior to incorporation is completely written off, it must beshown as an asset in the assets side of the balance sheet under theheading miscellaneous expenditure.

(iv) According to section 209(4A) of the Companies Act, 1956, a companymust preserve its books of account and its relevant vouchers for aminimum period of eight years.

(v) A company cannot issue redeemable preference shares for a periodexceeding twenty years.

Question 2

(a) The balance sheets of H Ltd. and its subsidiary S Ltd. as on 31st March,2011 are as follows :

Liabilities H Ltd. S Ltd. (` ) (` )

Equity shares of ` 100 each 30,00,000 15,00,000General reserve (1st April, 2010) 8,00,000 4,00,000Profit and loss account (1st April, 2010) 2,00,000 2,50,000Net profit for the year 6,00,000 4,00,000


15% Debentures 10,00,000 ––

Creditors 4,00,000 2,70,000

Bills payable 60,000 30,000

60,60,000 28,50,000

Liabilities H Ltd. S Ltd. (` ) (` )

Premises 14,00,000 9,00,000

Machinery 12,00,000 7,00,000

Investment in shares of S Ltd. 17,00,000 ––

Inventories 7,00,000 4,50,000

Debtors 5,00,000 4,20,000

Bills receivable 1,80,000 80,000

Cash and bank 3,80,000 2,00,000

Misc. expenditure –– 1,00,000

60,60,000 28,50,000

The following are the additional information :

(i) H Ltd. acquired 12,000 equity shares in S Ltd. on 1st April, 2010.(ii) Bills receivable of H Ltd. include ` 30,000 accepted by S Ltd.(iii) Accounts receivable of H Ltd. include ` 1,00,000 due from S Ltd.(iv) Inventories of S Ltd. include goods purchased from H Ltd. for

`1,25,000 which were invoiced by H Ltd. at a profit of 25% on cost.(v) Both H Ltd. and S Ltd. have proposed 10% dividend for the year

2010-11 but no effect has been given in the balance sheets.Prepare a consolidated balance sheet giving proper working notes.

(11 marks)

(b) What do you mean by ‘profits prior to incorporation’ ? How such profitsare apportioned and utilised ? (4 marks)

Answer 2(a)Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd.

as on 31st March 2011

Liabilities Amount (`) Amount (`) Assets Amount (`) Amount (`)

Share capital Fixed Assets30,000 Equity Goodwill 60,000shares @` 100 each 30,00,000Minority Interest 4,60,000 PremisesReserves and H Ltd. 14,00,000Surplus S Ltd. 9,00,000 23,00,000General Reserve 8,00,000


Liabilities Amount (`) Amount (`) Assets Amount (`) Amount (`)

Profit & Loss A/c 8,00,000 Machinery

Secured Loans H Ltd. 12,00,00015% Debentures 10,00,000 S Ltd. 7,00,000 19,00,000

Current Liabilities Current Assets,and Provisions Loans and

AdvancesCreditors: Inventories

H Ltd. 4,00,000 H Ltd. 7,00,000S Ltd. 2,70,000 S Ltd. 4,50,000

6,70,000 11,50,000Less: Profit onUnrealized Stock 20,000 11,30,000

Less: Mutual Owings 1,00,000 5,70,000 DebtorsBills Payable:

H Ltd. 60,000 H Ltd. 5,00,000 S Ltd. 30,000 S Ltd. 4,20,000

90,000 9,20,000

Less: Mutual Owings 30,000 60,000 Less: Mutual Owings 1,00,000 8,20,000

Proposed Dividend 3,30,000 Bills Receivable:

H Ltd. 1,80,000S Ltd. 80,000

Less: Mutual Owings 2,60,000

30,000 2,30,000

Cash and Bank

H Ltd. 3,80,000S Ltd. 2,00,000 5,80,000

70,20,000 70,20,000

Working Notes:

(1) Pre-acquisition profits and reserves of S Ltd.

`

Profit & Loss A/c as on 1st April 2010 2,50,000

Add : General Reserves as on 1st April 2010 4,00,000

Total 6,50,000

H Ltd.’s share (4/5th of 6,50,000) 5,20,000

Minority Interest (1/5th of 6,50,000) 1,30,000


(2) Post-acquisition profits of S Ltd. `

Profits for the year ending 31st March 2011 4,00,000

Less : Proposed Dividend (10% of 15,00,000) 1,50,000

2,50,000

H Ltd.’s share (4/5th of 2,50,000) 2,00,000

Minority Interest (1/5th of 2,50,000) 50,000

(3) Calculation of Cost of Control or Goodwill `

Paid up value of 12,000 equity shares held by H Ltd.(12,000 x 100) 12,00,000

Add : 4/5th share in Pre-acquisition profits and reserves 5,20,000

17,20,000

Less : 4/5th share of Miscellaneous Expenditure 80,000

Intrinsic value of shares on the date of acquisition 16,40,000

Investments by H Ltd. in S Ltd. for 12,000 shares 17,00,000

Less: Intrinsic value of shares on the date of acquisition 16,40,000

Goodwill 60,000

(4) Calculation of Minority Interest `

Paid up value of 3,000 equity shares (3,000 x 100)held by outsiders 3,00,000

Add : 1/5th share in Pre-acquisition profits and reserves 1,30,000

1/5th share in Post-acquisition profits 50,000

4,80,000

Less : 1/5th share of Miscellaneous Expenditure 20,000

4,60,000

(5) Unrealised profit on Stock `

Value of Unsold Stock 1,25,000

Profit on unsold stock (20% of Selling Price)=(20% of 1,25,000) 25,000

H Ltd.’s share (4/5th of 25,000) 20,000

(6) Profit & Loss A/c of H Ltd. `

Profits for the year ending 1st April 2010 of H Ltd. 2,00,000

Add : Profits for the year ending 31st March 2011 of H Ltd. 6,00,000

8,00,000

Less : Proposed Dividend (10% of 30,00,000) 3,00,000

5,00,000Less : Unrealised Profit on Stock 20,000

4,80,000


Add : H Ltd.’s share in Post-acquisition profits of S Ltd. 2,00,000

Add : H Ltd.’s share in Proposed Dividend of S Ltd.

(4/5th of 1,50,000) 1,20,000

8,00,000

(7) Proposed Dividend `

Dividend Proposed by H Ltd. 3,00,000

Minority Shareholders’ share in Proposed Dividend ofS Ltd. (1/5th of 1,50,000) 30,000

Total 3,30,000

Answer 2(b)

Profits Prior to Incorporation

Sometimes a newly formed company takes over/acquires an existing business. Theprofit of the company prior to the date of incorporation of the company thus acquired i.e.the period from the date of purchase till the date of incorporation is called Profits Prior toIncorporation. Such a profit belongs to the company. But profit prior to incorporationshould not be regarded as trading profit of the company since the company cannot earnprofit before it comes into existence. In fact, such profit increases the net assets acquiredby the company on its formation and comes to it as capital. Thus, profit prior toincorporation is of capital nature and cannot be credited to the Profit and Loss Account.It cannot ordinarily be used for the purpose of payment of dividend.

Hence, such a profit should be credited to Capital Reserve Account which can beutilized in writing off capital losses like preliminary expenses, discount on issue of sharesor debentures or in writing down the value of fixed assets including goodwill. Until it isfully utilized, Capital Reserve Account has to be shown in the liabilities side of the BalanceSheet under the heading “Reserve and Surplus”.

The apportionment of profits between the pre-incorporation and post-incorporationperiods can be done on any one of the following basis:

Time basis : The profit or loss for the whole accounting period is apportioned betweenthe periods prior to and after incorporation on the basis of time i.e., in proportion of thetime of the respective periods.

Turnover basis : The profit or loss for the whole accounting period is apportionedbetween the periods prior to and after incorporation on the basis of turnover, i.e., inproportion of the turnover of the respective periods.

Equitable basis : In equitable method, the gross profit or gross loss of the wholeaccounting period is apportioned on the basis of the turnover. The expenses varying withturnover are apportioned on the basis of turnover and those which depend upon time areapportioned on the basis of time.


Question 3

(a) On 1st April, 2010, Rosy Ltd. issued 20,000, 13% debentures of ` 100 eachat 5% discount. Debentureholders have an option to convert their holdingsin 14% preference shares of ` 100 each at a premium of ` 25 per share.On 31st March, 2011, one year’s interest has accrued on these debenturesand has remained unpaid. A holder of 100 debentures notified his intentionto convert his holdings in 14% preference shares. Journalise thesetransactions. Also show workings for number of preference shares to be issuedin exchange.

(7 marks)

(b) Reliable Ltd. furnishes you with following balance sheet as on 31st March,2011 :

Balance Sheet

Liabilities ` in Crores

Share capital :

12% Redeemable preference shares @ ` 100 each,fully paid-up 75

Equity shares of ` 10 each, fully paid-up 25

Reserves and surplus :

Capital reserve 15

Securities premium 25

Revenue reserve 260

Current liabilities and provisions :

Current liabilities 40

440

Assets ` in Crores

Fixed assets 100

Less provision for depreciation 100 Nil

Investments (Market value ` 400 crore) 100

Current assets 340

440

The company redeemed preference shares on 1st April, 2011. It also boughtback 50 lakh equity shares of ` 10 each at ` 50 per share. The paymentfor the above are made out of the huge bank balance, which appeared asa part of current assets.

Make journal entries to record the above and prepare balance sheet as on1st April, 2011 after redemption of preference shares and buy-back of equityshares. (8 marks)


Answer 3(a)In the books of Rosy Ltd.

Journal Entries

Date Particulars Debit CreditAmount (`) Amount (`)

1/04/2010 Bank Dr. 19,00,000

To Debentures Application & Allotment A/c 19,00,000

(Being application money received on20,000 debentures @ ̀ 95 each)

1/04/2010 Debentures Application & Allotment A/c Dr. 19,00,000

Discount on Issue of Debentures A/c Dr. 1,00,000

To 13% Debentures A/c 20,00,000

(Being the issue of 20,000, 13% Debenturesof ` 100 each at 5% discount)

31/03/2011 Debenture Interest A/c Dr. 2,60,000

To Debentureholders A/c 2,60,000

(Being interest due on 2,000 debentures of` 100 @13%)

31/03/2011 Profit and Loss A/c Dr. 2,60,000

To Debenture Interest A/c 2,60,000

(Being transfer of debenture interest accountto Profit and Loss A/c)

31/03/2011 13% Debentures A/c Dr. 10,000

To 14% Preference Share Capital A/c 7,600

To Premium on issue of Preference shares A/c 1,900

To Discount on Issue of Debentures A/c 500

(Being conversion of 100, 13% Debenturesof ` 100 each at 5% discount to PreferenceShares of ̀ 100 each issued at 5% premium)

Working Notes:

Calculation of Number of Preference shares to be issued:Nominal Value of 100, 13% Debentures (`100 x 100) ` 10,000

Less : 5% Discount ` 500

Amount Received for 100 Debentures ` 9,500

Issue Price of Preference Shares (` 100 + 25) ` 125


Number of Preference Shares to be issued (` 9500/125) 76

Face Value of Preference Shares (100 x 76) ` 7,600

Premium on issue of Preference shares ` 1,900

Answer 3(b)In the books of Reliable Ltd.

Journal Entries ` in crores


12% Redeemable Preference Share Capital A/c Dr. 75

To Preference Shareholders A/c 75

(Being preference shares redeemed)

Revenue Reserves A/c Dr. 75

To Capital Redemption Reserve A/c 75

(Being amount equal to par value of preference sharesredeemed out of profits, transferred to capital redemp-tion reserve)

Preference Shareholders A/c Dr. 75

To Bank A/c 75

Being amount paid to preference shareholders)

Equity Share Capital A/c Dr. 5

Securities Premium A/c Dr. 20

To Equity Shareholders A/c 25

(Being cancellation of 50 lakh equity shares of ` 10each @ ` 50 each, premium paid out of securitiespremium)

Securities Premium A/c Dr. 5

To Capital Redemption Reserve A/c 5

(Being transfer made to Capital Redemption Reserveon buy back as required by section 77AA)

Equity Shareholders A/c Dr. 25

To Bank 25

(Being amount paid to equity shareholders)


Balance Sheet of Reliable Ltd.as on 1st April 2011

Liabilities ` Assets `

Share Capital Fixed Assets NIL

Equity Shares of ` 10 each Investments (Market value

fully paid up 20 ` 400 crores) 100

Reserves and Surplus Current Assets 240

Capital Reserve 15

Capital Redemption Reserve 80

Revenue Reserve 185

Current Liabilities and ProvisionsCurrent Liabilities 40

340 340

Question 4

(a) The balance sheet of Ashoka Ltd. as on 31st March, 2011 was as follows:


Share capital : Sundry assets 17,00,000

Authorised :

1,50,000 Equity shares of` 10 each 15,00,000

Issued, subscribed, called-upand paid-up :

80,000 Equity shares of ` 7.50per share called and paid-up 6,00,000

Reserves and surplus :Capital redemption reserve 1,50,000

Plant revaluation reserve 20,000

Securities premium 1,50,000

Development rebate reserve 2,30,000

Investment allowance reserve 2,50,000

General reserve 3,00,000

17,00,000 17,00,000

The company wanted to issue bonus shares to its shareholders at the rateof one share for every two shares held. Necessary resolution was passed.Give necessary journal entries and prepare amended balance sheet.

(6 marks)


(b) Write short notes on any three of the following :

(i) Provision for taxation and advance payment of tax

(ii) Purposes of valuation of shares

(iii) Fair value of shares

(iv) Capitalisation of profits and reserves. (3 marks each)

Answer 4(a)

In the books of Ashoka Ltd.Journal Entries


Equity Share Final Call A/c Dr. 200,000

To Equity Share Capital A/c 200,000

(Being the final call money due on 80,000shares @ ` 2.50 per share as per Board’sresolution no. dated ___________ )

General Reserve A/c Dr. 200,000

To Equity Share Final Call A/c 200,000

(Being bonus issue made to make partly paidup shares fully paid.)

Capital Redemption Reserve A/c Dr. 1,50,000

Securities Premium A/c Dr. 1,50,000

General Reserve A/c Dr. 1,00,000

To Bonus to shareholders A/c 4,00,000

(Being one bonus share payable for two sharesheld as per shareholders resolution no. dated_______ )

Bonus to shareholders A/c Dr. 4,00,000

To Equity Share Capital A/c 4,00,000

(Being issue of 40,000 shares of ̀ 10 each asper Board’s resolution no. dated ___________)


Amended Balance Sheet of Ashoka Ltd.as on 31st March 2011


Authorised Capital Sundry Assets 17,00,000

1,50,000 Equity Shares of

` 10 each 15,00,000

Issued, Subscribed and Paid Up1,20,000 Equity Shares of ` 10each (including 40,000 bonusshares) 12,00,000

Reserves and Surplus:

Plant Revaluation Reserve 20,000

Development Rebate Reserve 2,30,000

Investment Allowance Reserve 2,50,000

17,00,000 17,00,000

Answer 4(b)(i)

Provision for taxation and advance payment of tax

Provision for taxation : A company is liable to pay tax on profits under the Income-tax Act, 1961 and such tax is treated as charge against the profits of the accountingyear, although the profits are assessed and actual liability for tax is determined in thefollowing year. As such, the liability for tax is estimated and provided for while preparingthe final accounts. The estimated amount of tax is debited to the Profit and Loss Accountand is credited to “Provision for Taxation Account”. This is shown on the liabilities side ofthe Balance Sheet under the head “Current Liabilities and Provisions”.

Advance payment of tax : All the companies are required to make advance paymentof tax in the accounting year itself subject to adjustment against the actual liability asand when determined. Until and unless the actual tax liability is determined and adjustedagainst advance payment of tax, “Advance Payment of Tax Account” will show a debitbalance which is shown in the Balance Sheet on the assets side under the head “CurrentAssets, Loans and Advances”.

Answer 4(b)(ii)

Purposes for valuation of shares

The purposes for valuation of shares are as follows:

— Assessments under the Wealth Tax or Gift Tax Acts.

— Purchase of a block of shares which may or may not give the holder thereof acontrolling interest in the company.


— Purchase of shares by employees of the company.

— Formulation of schemes of amalgamation, absorption, etc.

— Acquisition of interest of dissenting shareholders under a scheme of reconstruction.

— Compensating shareholders on the acquisition of their shares by the Governmentunder a scheme of rationalization.

— Conversion of shares, say, preference into equity.

— Advancing a loan on the security of shares.

Answer 4(b)(iii)

Fair value of shares

The fair value of a share is the average of the value of shares obtained by the netassets method and the one obtained by yield method. Under net assets method, thevalue of an equity share is arrived at by valuing the assets of a company and deductingtherefrom all the liabilities and claims of preference shareholders and dividing the resultantfigure by the total number of equity shares with the same paid up value. Under yieldmethod, the value of an equity share is arrived at by comparing the expected rate ofreturn with the normal rate of return. If the expected rate of return is more than normalrate of return, the market value of the share is increased proportionately. This method isalso known as dual method of share valuation. This method attempts to minimize thedemerits of both the methods.

The fair value of shares can be calculated by using the following formula:

Fair value of share = 2

method yield by Value method asset net by Value +

Answer 4(b)(iv)

Capitalisation of profits and reserves

When a company accumulates huge reserves out of its profits which are much inexcess of the needs of the company, the excess amount can be distributed by way ofbonus shares among the existing shareholders of the company. Thus, the accumulatedprofits and reserves of the company are converted into its share capital which ispermanently used in the business. This process of issue of bonus shares is known as“capitalisation of profits and reserves”. Capitalisation of accumulated profits and reservesof a company is possible only if the Articles of the company contain such a provision.Bonus shares are issued by the company free of charge to its existing shareholders on apro-rata basis.

PART B

(Answer Question No. 5 which is compulsoryand any two of the rest from this part.)

Question 5


(i) Semi-variable costs are ignored in marginal costing.


(ii) ‘Cost volume profit relationship’ is a more comprehensive term than‘break-even analysis’.

(iii) Sunk costs are not relevant for decision-making.(iv) ‘Costing’ and ‘cost accounting’ are the same.(v) High wages means high cost of production. (2 marks each)

(b) Write the most appropriate answer from the given options in respect of thefollowing :(i) Opportunity cost helps in —

(a) Ascertainment of cost(b) Controlling cost(c) Making managerial decisions(d) None of the above.

(ii) Fixed cost per unit increases when ––(a) Production volume decreases(b) Production volume increases(c) Variable cost per unit decreases(d) Variable cost per unit increases.

(iii) The costing method in which fixed factory overheads are added toinventory is —(a) Direct costing(b) Marginal costing(c) Absorption costing(d) Activity based costing.

(iv) Cash flow statement is required for the financial planning of —(a) Short range(b) Long range(c) Medium range(d) Very long range.

(v) The type of spoilage that does not affect the cost of inventories is —(a) Normal spoilage(b) Standard spoilage(c) Abnormal spoilage(d) Seasonal spoilage. (1 mark each)

(c) Re-write the following sentences after filling-in the blank spaces withappropriate word(s)/figure(s) :

(i) At break-even point, the contribution will be equal to .

(ii) is a budget designed to furnish budgeted costs forany level of activity actually attained.

(iii) A current ratio of less than one implies that the working capital is.

(iv) The process of physical verification of stores throughout the year isknown as .

(v) In contract costing, the cost unit is a . (1 mark each)


Answer 5(a)

(i) False : Semi variable costs are not ignored in the marginal costing. They arefurther segregated into fixed and variable costs keeping in view the variableproportion by the appropriation method.

(ii) True : Cost volume profit relationship is more comprehensive term because thedetermination of cost volume profit relationship includes marginal cost approach,break even analysis, profit volume ratio, key factor etc.

(iii) True : A sunk cost is one that has already been incurred and cannot be avoidedby decisions taken in the future. As it refers to past costs, it is called unavoidablecost. This cost is not useful for decision making as all past costs are irrelevant.It is the past cost and not taken into account for decision making.

(iv) False : Costing is different from cost accounting in the sense that the costingprovides only the basis and information for ascertainment of costs. Whereas thecost accounting is classifying, recording and allocating expenditure fordetermination of costs of products or services and for the presentation of datafor the purposes of control and guidance of management.

(v) False : The high or low cost of production depends upon the efficiency andeffectiveness of workers. High wages provide incentives to workers to becomeefficient and effective as such high wages does not mean high cost of production.

Answer 5(b)(i)

(c) making managerial decisions

Answer 5(b)(ii)

(a) production volume decreases

Answer 5(b)(iii)

(c) absorption costing

Answer 5(b)(iv)

(a) short range

Answer 5(b)(v)

(a) normal spoilage

Answer 5(c)

(i) At break-even point, the contribution will be equal to fixed costs.(ii) Flexible budget is a budget designed to furnish budgeted costs for any

level of activity actually attained.(iii) A current ratio of less than one implies that the working capital is

negative.(iv) The process of physical verification of stores throughout the year is known

as Perpetual Inventory system.(v) In contract costing, the cost unit is a contract.


Question 6

(a) The balance sheets of X Ltd. as on 31st March, 2010 and 31st March,2011 were as follows :

Liabilities As on As on 31st March, 2010 31st March, 2011

( ` ) (` )

Share capital 5,00,000 7,00,000

General reserve 50,000 70,000

Profit and loss account 1,00,000 1,60,000

Sundry creditors 1,53,000 1,90,000

Bills payable 40,000 50,000

Outstanding expenses 7,000 5,000

8,50,000 11,75,000

Assets

Land and building 80,000 1,20,000

Plant and machinery 5,00,000 8,00,000

Stock 1,00,000 75,000

Sundry debtors 1,50,000 1,60,000

Cash 20,000 20,000

8,50,000 11,75,000

Additional information :

(i) ` 50,000 depreciation has been charged to plant and machineryduring the year 2011.

(ii) A piece of machinery costing ` 12,000 (depreciation provided thereon` 7,000) was sold at 60% profit on book value.

You are required to prepare cash flow statement. (8 marks)

(b) From the following information, calculate economic order quantity (EOQ) andthe number of orders to be placed in one quarter of the year :

(i) Quarterly consumption of material : 2,000 kg.

(ii) Cost of placing one order : `50

(iii) Cost per unit : `40

(iv) Storage and carrying cost : 8% on average inventory. (3 marks)

(c) What are the components of total cost shown in the cost sheet ? Givethe uses of the cost sheet. (4 marks)


Answer 6(a)

Cash Flow Statement of X Ltdfor the year ended 31.3.2011

Particulars ` `

I. Cash Flows from Operating Activities:

Closing balance as per Profit & Loss A/c 1,60,000

Less : Opening balance as per Profit & Loss A/c (1,00,000)

Add : Transfer to reserve 20,000

Net profit before taxation and extra ordinary items 80,000

Add : Adjustment for Depreciation 50,000

Less: Profit on Sale of Machinery (3,000) 47,000

Operating profit before Working Capital Changes 1,27,000

Add : Decrease in current assets & increase incurrent liabilities :

Decrease in stock 25,000

Increase in creditors 37,000

Increase in Bills payable 10,000 72,000

Less : Increase in current Assets & decrease incurrent liabilities

Increase in sundry debtors 10,000

Decrease in Outstanding Expenses 2,000 (12,000)

Net cash from operating activities 1,87,000

II. Cash Flow from Investing Activities :Purchase of Land and Building (40,000)

Purchase of Plant & machinery (3,55,000)

Proceeds from sale of machine 8,000

Net cash used in investing activities (3,87,000)

III Cash Flow from Financing Activities :Proceeds from issue of share capital 2,00,000

Net cash from financing activities 2,00,000

IV Net increase in cash and cash equivalents[ I + II + III ] NIL

V. Add : Cash and cash equivalents at the beginningof the period 20,000

VI. Cash and cash equivalents at the end of the period(IV + V) 20,000


Working Notes:

Dr. Plant & Machinery A/c Cr.

Particulars ` Particulars `

To Balance b/fd 5,00,000 By Depreciation A/c 50,000

To Profit & Loss A/c (Profit on By Bank 8,000sale) 3,000 By Balance c/fd 8,00,000

To Bank (Purchases)(Balancing figure) 3,55,000

8,58,000 8,58,000

Book Value of machinery sold = Original Cost – Depreciation

= ` 12,000 – ̀ 7,000

= ` 5,000

Profit on sale of machinery = 60% of ` 5,000 = ` 3,000

Sale proceeds of machinery = Book Value + Profits

= ` 5,000 + 3,000

= ` 8,000Answer 6(b)

Economic Order Quantity (EOQ) = 3.250 x 8000 x 2

C

O x A x 2=

= 500 kgs

Number of orders per Quarter =EOQ

nConsumptio Quarterly

=500

2000

= 4 ordersWorking Notes :

A = Annual Demand = 2000 x 4 = 8,000 kgs

O = Ordering Cost = ̀ 50 per order

C = Carrying Cost = Cost per unit x Cost of Storage = 40 x 8% = ` 3.2

Answer 6(c)

Components of the total cost shown in the cost sheet are as follows:

Prime Cost = Direct Materials + Direct Labour + Direct (or Chargeable) Expenses

Factory/Works Cost = Prime Cost + Factory Overheads


Cost of Production = Factory/Works Cost + Administrative Overheads

Total Cost or Cost of Sales = Cost of Production + Selling and Distribution Overheads

Uses of Cost Sheet

— It gives total cost and cost per unit for a particular period.

— It gives information to management for cost control.

— It provides comparative study of actual current costs with the cost ofcorresponding periods, thus causes of inefficiencies and wastage can be knownand suitably corrected by management.

— It acts as a guide to manufacture in formulation of suitable and definite policiesand in fixing up the selling price.

Question 7

(a) The cost accountant of Raman Ltd. has computed labour turnover rates forthe quarter ended 31st March, 2011 as 10%, 5% and 3% under flux method,replacement method and separation method respectively.

If the number of workers replaced during the quarter is 30, find out the numberof ––

(i) Workers recruited and joined; and

(ii) Workers left and discharged. (6 marks)

(b) The monthly budgets for the manufacturing overheads of a concern for twolevels of activity were as follows :

Capacity 60% 100%

Budgeted production (units) 600 1,000

` `

Wages 1,200 2,000

Consumable stores 900 1,500

Maintenance 1,100 1,500

Power and fuel 1,600 2,000

Depreciation 4,000 4,000

Insurance 1,000 1,000

9,800 12,000

You are required to ––

(i) Indicate which of the items are fixed, variable and semi-variable;

(ii) Prepare a budget for 80% capacity; and

(iii) Find total cost, both fixed and variable costs per unit of output at60%, 80% and 100% capacity. (6 marks)

(c) Briefly point out the process of budgetary control. (3 marks)


Answer 7(a)

(i) Replacement Method

Labour Turnover Rate = roll on workersof no. average

100 x replaced workersof No.

Or, 5 = roll on workersof no. average

100 x 30

Or, average no. of workers on roll = 3000/ 5

= 600

(ii) Separation Method

Labour Turnover Rate = roll on workersof no. average

100 x discharged and left workersof No.

Or, 3 = 600

100 x discharged and left workersof No.

Or, no. of workers left and discharged = 18

(iii) Flux Method

Labour Turnover Rate

= roll on workersof no. Average100 x joined) and recruited workersof No. discharged and left workersof (No. +

Or, 10 = 600

100 x joined) and recruited workersof No. (18 +

Or, no. of workers recruited and joined = 60 – 18 = 42

Answer 7(b)

(i) Fixed Costs : Depreciation and Insurance

Variable Costs : Wages (` 2 per unit)

Consumable Stores (` 1.5 per unit)

Semi - Variable Costs:

Maintenance

Variable = `600 - 1000

1100 - 1500

= ` 1 per unit


Fixed = ` 1100 – ` 600 = ` 500

Power and Fuel

Variable = ` 600 - 1000

1600 - 2000

= `1 per unit

Fixed = ` 1600 – ` 600 = `1,000

(ii) Budget for 80% capacity (800 units) `

Wages (` 2 per unit) 1,600

Consumable Stores (`1.5 per unit) 1,200

Maintenance (` 1 per unit + 500) 1,300

Power and Fuel (‘` 1 per unit + 1,000) 1,800

Depreciation 4,000

Insurance 1,000

Total Cost 10,900

(iii) Flexible budget

Capacity 60% 80% 100%Units 600 800 1000

Total Per unit Total Per unit Total Per unitCost ` Cost ` Cost `

Fixed Costs

Depreciation 4,000 4,000 4,000

Insurance 1,000 1,000 1,000

Maintenance 500 500 500

Power and Fuel 1,000 1,000 1,000

(A) Total 6,500 10.83 6,500 8.125 6,500 6.5

Variable CostsWages (` 2 per unit) 1,200 1,600 2,000

Consumable Stores

(` 1.5 per unit) 900 1,200 1,500

Maintenance (` 1 per unit) 600 800 1,000

Power and Fuel (`1 per unit) 600 800 1,000

(B) Total 3,300 5.5 4,400 5.5 5,500 5.5

Total Cost (A + B) 9,800 16.33 10,900 13.625 12,000 12


Answer 7(c)

Process of Budgetary Control

Budgetary control involves continuous comparison of actual results with the budgetsand taking appropriate remedial action promptly. The budgetary control system involvesfixing of targets (in the form of specific tasks), collection of information regarding actualsand continuous comparison of actuals with the targets with a view to reporting for action.The process of budgetary control is as follows:

(i) Organisation Chart : An organisational chart is prepared defining functionalrepresentatives of executives responsible for accomplishment of organisationalobjectives.

(ii) Budget Centre : Budget centre is established for cost control and all the budgetsshould be related to cost centres.

(iii) Budget Manual : A budget manual is prepared which sets outstanding instructionsgoverning the responsibilities of persons and the procedures, forms and recordsrelating to the preparation and use of budgets.

(iv) Budget Controller : A budget controller is appointed to line up the various functionsof Budget Committee and compiling information of all types for the purposes ofefficient preparation of budgets and proper reporting.

(v) Budget Committee : The budget committee is set up comprising of group ofrepresentatives of various functions in an organisation.

(vi) Budget Period : The budget period is determined. It refers to the period of timecovered by a budget. It can be “long-term budget” or “short-term budget”.

(vii) Budget Reports : Finally budget reports are prepared showing the comparisonbetween the actual and budgeted expenditure.

Question 8

(a) From the following information pertaining to ABC Ltd., prepare its trading,profit and loss account for the year ended 31st March, 2011 and summarisedbalance sheet as at that date :

Current ratio = 2.5Quick ratio (quick assets/quick liabilities) = 1.3Proprietary ratio (fixed assets/proprietary funds) = 0.6Gross profit to sales ratio = 10%Debtors velocity = 40 daysSales = `7,30,000Working capital = `1,20,000Bank overdraft = `15,000

Share capital = `2,50,000Closing stock = 10% more than opening stock

Net profit = 10% of proprietary funds. (9 marks)


(b) A company has annual fixed cost of ` 1,68,00,000. In the year 2010-11,sales amounted to ` 6,00,00,000 as compared with ` 4,50,00,000 in thepreceding year 2009-10. The profit in the year 2010-11 is ` 42,00,000 morethan that in 2009-10. On the basis of the above information, answer thefollowing :

(i) What is the break-even level of sales of the company ?

(ii) Determine profit/loss on the forecast of a sales volume of ` 8,00,00,000.

(iii) If there is a reduction in selling price by 10% in the financial year2011-12 and company desires to earn the same amount of profit asin 2010-11, what would be the required sales volume ? (6 marks)

Answer 8(a)

In the books of ABC Ltd.

Dr. Trading and Profit & Loss Account for the year ended 31st March, 2011 Cr.


To Opening Stock 1,05,000 By Sales 7,30,000

To Purchases (Balancing figure) 6,67,500 By Closing Stock 1,15,500

To Gross Profit c/d 73,000

8,45,500 8,45,500

To Opening Expenses(Balancing figure) 43,000 By Gross Profit b/d 73,000

To Net Profit c/d 30,000

73,000 73,000

To Balance c/d 50,000 By Balance b/d 20,000

By Net Profit 30,000

50,000 50,000

Summarised Balance Sheet as at 31st March, 2011


Share Capital 2,50,000 Fixed Assets 1,80,000

Reserves and Surplus : Current Assets :Profit & Loss A/c 50,000 Stock 1,15,500

Current Liabilities : Debtors 80,000

Bank overdraft 15,000 Other Current Assets 4,500

Other Current Liabilities 65,000

3,80,000 3,80,000


Working Notes:

(i) Current Liabilities and Current Assets :

Let Current Liabilities be x

Given Current Ratio = 2.5

Current Assets = 2.5x

Working Capital = 2.5x – x = 1.5x

Or, x =1.5

1,20,000

= ` 80,000

So, Current Liabilities = ` 80,000

Current Assets = ` 80,000 x 2.5 = ` 2,00,000

(ii) Closing Stock :

Given Quick Ratio = 1.3

Or,sLiabilitie Quick

Stock Closing - Assets Current = 1 .3

Or,65,000

Stock Closing - 2,00,000 = 1.3

Or, Closing Stock = 2,00,000 – 84,500 = ` 1,15,500

(iii) Opening Stock = ` 1,15,500 x 100/110 = ̀ 1,05,000

(iv) Debtors = ` 7,30,000 x 40/365 = ` 80,000

(v) Other current assets = Current Assets – Closing Stock - Debtors

= ` 2,00,000 – 1,15,500 – 80,000

= ` 4,500

(vi) Gross Profit = ` 7,30,000 x 10/100

= ` 73,000

(vii) Proprietors’ Funds

Proprietary Ratio = 0.6

Or,Fund yProprietar

Assets Fixed = 0.6

Or, Working Capital = 0.4


Proprietary Fund = 0.4

1,20,000

= ` 3,00,000

(vi) Fixed Assets = 3,00,000 x 0.6 = ` 1,80,000

(vii) Net Profit = 10% of proprietary funds = ` 30,000

(viii) Opening Balance of Profit and Loss Account:

` `

Proprietary Fund 3,00,000

Less : Share Capital 2,50,000

Net Profit 30,000 (2,80,000)

20,000

(xi) It is assumed that there was no general reserve or other reserves

Answer 8(b)

(i) P/V Ratio =Sales in ChangeProfits in Change

= 450,00,000 - 600,00,000100 x 42,00,000

= 28 %

Break Even Sales =Ratio P/VCosts Fixed

= 28%01,68,00,00

= ` 600,00,000

(ii) Contribution for Sales Volume of ̀ 800,00,000 = P/V Ratio x Sales

= 28% x 800,00,000

= ` 224,00,000Profits = Contribution – Fixed costs

= ` 224,00,000 - ̀ 168,00,000

= ` 56,00,000

(iii) If Selling Price is 100

Variable Cost is (100 – 28) 72

New Selling Price (100-10%) 90

New Contribution (90-72) 18

New P/V Ratio = 90100 x 18

20 %


Contribution for Sales Volume of ̀ 600,00,000 for the year 2010-11

= P/V Ratio x Sales

= 28% x ` 600,00,000

= ` 168,00,000

Desired Profits = Contribution – Fixed Costs

= ` 168,00,000 - ̀ 168,00,000

= Nil

Required Sales Volume = Ratio P/VProfits Desired Costs Fixed +

= ` 20%

168,00,000

= ` 840,00,000

EP–TL– December 2011 48

TAX LAWS


NOTE : All references to sections mentioned in Part - A of the Question Paper relate tothe Income-tax Act, 1961 and the relevant Assessment Year 2011-12 unlessstated otherwise.

PART A(Answer Question No. 1 which is COMPULSORY

and ANY THREE of the rest from this part)

48

Question 1

(a) Write the most appropriate answer from the given options in respect of thefollowing having regard to the provisions of the relevant direct tax laws :

(i) Which of the following income is not exempt under section 10 ––

(a) Share in total income of firm

(b) Income from agriculture in Lahore

(c) Bonus on life insurance

(d) Income from mutual funds.

(ii) Which of the following income is taxable under the head ‘income fromsalary’ ––

(a) Salary received by a partner from firm

(b) Salary received by a Member of Parliament

(c) Salary of a Government Officer

(d) None of the above.

(iii) Rate of depreciation chargeable on fully temporary wooden structurefor the assessment year 2011-12 is ––

(a) 5%

(b) 10%

(c) 100%


(iv) When the income of an individual includes `20,000 as the income ofhis minor child in terms of section 64(1A), taxable income in thisrespect will be ––

(a) Nil

(b) `20,000

(c) `18,500


(v) Deduction available to an individual in respect of maintenance including

49 EP–TL– December 2011

medical treatment of a dependent being a person with 80% disability,when amount incurred in this respect is `40,000 will be ––

(a) `40,000

(b) `50,000

(c) `1,00,000


(b) Re-write the following sentences after filling-in the blank spaces withappropriate word(s)/figure(s) :

(i) The residential status of an assessee is determined for the relevant__________.

(ii) For the purposes of clubbing of income of the specified person in theincome of the individual under section 64, the word ‘income’ includes_______________.

(iii) Deduction available under section 80QQB in respect of royalty incomeof authors shall not exceed `__________ in a previous year.

(iv) Rent received by original tenant from sub-tenant is taxable under thehead __________.

(v) Commissioner of Income-tax is appointed by ____________.(1 mark each)

(c) What are the requisites for filing a revised return under the Income-tax Act,1961 ? (5 marks)

Answer 1(a)(i)

(b) Income from agriculture in Lahore

Answer 1(a)(ii)

(c) Salary of a Government Officer

Answer 1(a)(iii)

(c) 100%

Answer 1(a)(iv)

(c) Rs.18,500

Answer 1(a)(v)

(c) Rs.1,00,000.

Answer 1(b)

(i) The residential status of an assessee is determined for the relevantPrevious year.

(ii) For the purposes of clubbing of income of the specified person in theincome of the individual under section 64, the word ‘income’ includesLoss.


(iii) Deduction available under section 80QQB in respect of royalty income ofauthors shall not exceed `̀̀̀̀3,00,000 in a previous year.

(iv) Rent received by original tenant from sub-tenant is taxable under the headIncome from other sources.

(v) Commissioner of Income-tax is appointed by Central Government.

Answer 1(c)

As per section 139(5) of the Income Tax Act, 1961, the requisites for filing a revisedreturn are as follows:

(i) Assessee has already furnished the return of income under Section 139(1), or inpursuance of a notice under Section 142(1) and

(ii) Discovers any omission or any wrong statement in the return filed, he mayfurnish a revised return.

(iii) Such revised return can be filed at any time before the expiry of one year fromthe end of the relevant assessment year or before the completion of theassessment, whichever is earlier.

Question 2


(i) Prize given to Suresh by the Government of Madhya Pradesh onaccount of higher crop yield is an agricultural income.

(ii) Voluntary contribution received by electoral trust shall be exempt in allcases.

(iii) Sandeep Ltd. is a company registered in Japan. The control andmanagement of its affairs is wholly situated in India. Sandeep Ltd. isnon-resident company in India.

(iv) The Commissioner (Appeals) may confirm, reduce or enhance theamount of tax assessed by the Assessing Officer.

(v) A partnership firm incurring loss need not to file return of income.(2 marks each)

(b) Vinod sells the following assets on 10th January, 2011 :

Equity Shares Jewellery Plot of Goodwill of ain R Ltd. Land Business

(self-generated) (` ) (` ) (` ) (` )

Sales consideration 6,00,000 7,50,000 25,00,000 25,00,000

Cost of acquisition 40,000 80,000 2,50,000 Nil

Transfer expenses 4,000 –– 25,000 ––

Date of acquisition 04.05.1988 04.03.1996 04.02.1991 ––


Based on the following indices, compute income from capital gains ofVinod for the assessment year 2011-12 taking into consideration the factsthat the business was set-up in November, 1997 and that he purchaseda plot of land for ` 8,00,000 and jewellery for ` 2,00,000 on 10th March,2011.

Cost inflation index for various years are — 1988-89 : 161; 1990-91 : 182; 1995-96 : 281; and 2010-11 : 711. (5 marks)

Answer 2(a)(i)False

Prize given to Mr. Suresh is not agricultural Income for him. Since the price is notrelated to basic as well as subsequent operations on land.

Answer 2(a)(ii)False

the voluntary contribution received by electoral trust is exempt only if the electoraltrust distributes to any political party, registered under section 29A of the Representationof the People Act, 1951, during previous year 95% of the aggregate donations receivedby it during the said previous year along with the surplus, if any, brought forward fromany earlier previous year; and such electoral trust functions in accordance with the rulesmade in this regard by the Central Government.

Answer 2(a)(iii)False

As the control and management of affairs of Sandeep Ltd. is wholly situated in Indiatherefore Sandeep Ltd. is a resident company in India.

Answer 2(a)(iv)True

According to Section 251, the Commissioner (Appeals) may confirm, reduce orannul the order of assessment.

Answer 2(a)(v)False

As per Section 139(1), it is mandatory obligation on the firm to file return of Incomeor loss.

Answer 2(b)Computation of Income from Capital Gains of

Mr. Vinod for the Assessment Year 2011-12

Particulars Equity shares Jewellery Plot of land Goodwill ofbusiness

` ` ` `

Sales consideration 6,00,000 7,50,000 25,00,000 25,00,000

Less : Indexed Cost ofacquisition 1,76,64 2,02,420 9,76,648 Nil


161

711 x 40,000

281711 x 80,000

182711 x 2,50,000

Nil

Less: Transfer expenses 4000 Nil 25,000 Nil

Long-term Capital gains 4,19,354 5,47,580 14,98,352 25,00,000

Income from long-term capital gains = 49,65,286

Note : No exemption is available in respect of purchase of a plot of land and jewelleryon March 10, 2011.

Question 3

(a) Adarsh, a Member of Parliament (MP) from Uttar Pradesh, submits theparticulars of his income for the assessment year 2011-12. Compute hisincome from other sources :

`

(i) Salary as MP 4,60,000

(ii) Daily allowances as MP 1,80,000

(iii) Dividend received from a domestic company 60,000

(iv) Winnings from horse race (gross) 40,000

(v) Winnings from Sikkim State lotteries received (net) 70,000

(vi) Agricultural income in Sri Lanka 4,00,000

He received a royalty of `1,00,000 from a book of stories written by him.He claimed `12,000 as expenditure on stationery and typing.

He let-out one of his buildings alongwith plant, machinery and furniturefor `50,000 per month. He claimed the following expenses as deductionfor this building –– insurance : `10,000; repairs : `15,000; depreciation:`40,000.

Interest credited to his recurring deposit account and cumulative time depositaccount in post office were `32,000 and `48,000 respectively.

(5 marks)

(b) Narayan had to pay `1,13,300 as advance tax during the financial year 2010-11. He has deposited the amount of advance tax as follows :

Date `

15.09.2010 29,760

15.12.2010 36,400

15.03.2011 47,140

Is he liable to pay any interest under section 234C ? If yes, determinethe amount of interest payable by him. (5 marks)

(c) Describe the provisions relating to chargeability of cash credits in respectof which the assessee has no satisfactory explanation. (5 marks)

` ` ` `


Answer 3(a)

Computation of Income from other sources ofMr. Adarsh for Assessment Year 2011-12

Particulars Amount (`)

Salary as M.P. 4,60,000

Daily allowance Exempt

Dividend from a domestic company Exempt

Winnings from Horse Race 40,000

Winnings from Sikkim state lotteries 1,00,000[70,000 x 100/70)

Agricultural income from Sri Lanka 4,00,000

Royalty from a book 1,00,000

Less : Expenses under section 57 12,000 88,000

Rent of Building along with plant, Machinery & furniture 6,00,000

Less : deduction for Expenditure under section 57

Insurance 10,000

Repairs 15,000

Depreciation 40,000 5,35,000

Interest on Post Office Recurring Deposit 32,000

Interest credited to P.O. CTD Account Exempt

Income from other sources 16,55,000

Note: Rate of TDS on State lotteries is 30%.

Answer 3(b)

Calculation of Interest Payable under section 234C by Shri Narayan

` `

Amount to be payable as advance tax at the time ofFirst installment (15.09.2010)

(1,13,300 x 30%) 33,990

Less : Amount Actually paid 29,760

Short fall 4,230

Interest payable on short fall(4,230 x 1% x 3 month) 126.9

Amount to be payable as advance tax up to thetime of second installment : (15.12.2010)

(1,13,300 x 60%) 67,980


` `

Less : Amount Actually paid up to second installment 66,160

Short fall 1,820Interest payable on this short fall

(1820 x 1% x 3 months ) 54.6

Amount to be payable as advance tax up to the time ofthird installment : (15.03.2011)

(1,13,300 X100%) 1,13,300

Less : Amount Actually paid up to Third installment 1,13,300

Short fall NIL

Total Interest Payable under section 234C 181.5 or182

Answer 3(c)

Under section 68 of the Act where any sum is found credited in the books of anassessee maintained for any accounting year and the assessee is not in a position tooffer explanation about the nature and source thereof or the explanation offered by himis not satisfactory in the opinion of the Assessing Officer, the sum so credited may betreated as the income of the assessee in respect of the accounting year in which thecash credits are found to have made in the books. This section comes into operationonly when the following conditions are satisfied:

(i) The Assessee maintains books of Account;

(ii) The assessee fails to explain the source and nature of the sum credited; or

(iii) The explanation offered by the assessee is not satisfactory and the assessingofficer comes to the conclusion that it is the undisclosed income of the Assessee.

Question 4

(a) Distinguish between any three of the following :

(i) ‘Gross total income’ and ‘total income’.

(ii) ‘Allowances’ and ‘perquisites’.

(iii) ‘Active user of asset’ and ‘passive user of asset’.

(iv) ‘Exemption under section 54G’ and ‘exemption under section 54GA’.

(v) ‘Statutory provident fund’ and ‘public provident fund’. (3 marks each)

(b) Mrs. Suman provides you following information regarding assets and liabilitiesowned by her on 31st March, 2011 :

Market Value (` )

(i) Residential house (self-occupied) 50,00,000

(ii) Loan taken for purchase of self-occupied house 10,00,000

(iii) Motor car for business use 10,00,000


(iv) Land in urban area 35,00,000

(v) Loan taken to purchase above land 5,00,000

(vi) Cash in hand 1,25,000

(vii) Cash at bank 2,00,000

(viii) Land in rural area within 5 kms. from Delhi 5,00,000

(ix) Jewellery 14,80,000

(x) Farm house situated outside 30 kms. from local

limits of municipality 40,00,000

(xi) One residential house given on rent for 330 days

during the previous year 35,00,000

(xii) Loan taken for construction of above house 5,00,000

Compute net wealth and wealth-tax liability of Mrs. Suman for theassessment year 2011-12. (6 marks)

Answer 4(a)(i)

“Gross total income” and “total income”

Gross total income means aggregate amount of income computed under five headsof Income i.e., salaries, house property, business and profession, capital gains andother sources. While total income means the taxable income arrives after allowingdeductions under Section 80C to 80U from gross total income.

The tax is calculated on the total Income. Gross Total Income is more than or equalto total income. Rounding off provision does not apply to Gross Total Income while totalincome shall be rounded off to the nearest multiple of ` 10.

Answer 4(a)(ii)

“Allowances” and “perquisites”

An allowance is a cash payment to employee on regular basis in addition to salaryto meet certain expenses incurred by him in connection with duties of his office or tocompensate him for any expenditure relating to performance of his duty in particularcircumstances or at particular place or under a contract. An allowance may be whollytaxable, partially taxable or wholly exempt.

On the other hand perquisites means any casual emolument, fee or profit attachedto an office or position in addition to salary or wages. It is a personal advantage andbenefit of the recipient. It may also be given voluntarily or under a contract, in cash or inkind by way of goods, service benefit or amenities.

Answer 4(a)(iii)

“Active user of asset” and “passive user of asset”

The user of the asset includes both active as well as passive user for claimingdepreciation allowance. Active user includes the actual use of the asset during theprevious year. The expression “used” should have a wider meaning so as to include notonly actual but also passive user.


Passive use means an asset is kept ready for use for the purpose of the businessalthough it was not worked during the year. Passive user entitles an assessee for thegrant of depreciation in the cases of forced idleness of machinery, spare engines kept instore by a transport undertaking in case of need, etc. Depreciation is admissible on thebasis of passive user in respect of residential quarters occupied by employees of theassessee near the place of business; depreciation is also allowable on assets like fans,air conditioners, refrigerators, furniture, etc. provided by employer at the quarters of hisemployees. The assessee is eligible for the grant of depreciation, when an asset becomesdefective and non-functional after its bona fide installation.

Answer 4(a)(iv)

“Exemption under section 54G” and “Exemption under Section 54GA”Any capital gain, (short-term/long-term), arising to any industrial undertaking from

the transfer of asset being machinery or plant or building or land or any rights in buildingor land effected in the course of or in consequence of shifting from an urban area to anyother area, shall be exempt to the extent, such capital gain is invested for the specifiedpurpose within one year before or 3 years after the date of its transfer, provided the newasset purchased for the specified purpose is not transferred within a period of 3 yearsfrom the date of its acquisition.

Notwithstanding anything contained in section 54G, where any capital gain, (short-term/long-term), arising from the transfer of a capital asset being machinery or plant orbuilding or land or any rights in building or land use for the purposes of the business ofan industrial undertaking situated in an urban area, effected in the course of or inconsequence of shifting of such industrial undertaking to any Special Economic Zonewhether developed in any urban area or any other area, shall be exempt to the extent,such capital gain is invested for the specified purpose within one year before or 3 yearsafter the date of its transfer.

Answer 4(a)(v)

“Statutory provident fund” and “Public provident fund”

‘Statutory provident fund’ is set-up under the Provident Fund Act, 1925 and ismaintained by Government or Semi-Government Offices or bodies, local authorities,railways, universities, colleges, corporations, banks and recognized educationalinstitutions, etc. while public provident fund is governed by Public Provident Fund Act,1968 to mobilize public savings.

Only salaried persons can become member of SPF while any member of the public,salaried as well as self-employed can participate in public provident fund.

The contribution of members under SPF is deducted by employers from the salaryof their employees while members of PPF have to open provident fund account at anybranch of the SBI or its subsidiaries and specified branches of nationalized banks;

Amount of contribution to SPF is computed at a specified rate on the amount ofsalary of an employee while under PPF a member can deposit any amount subject to aminimum of ` 500 and a maximum of ` 70,000 per year.

The amount deposited under PPF is repayable after 15 years which is not so in thecase of SPF.


Answer 4(b)

Computation of Wealth Tax liability ofMrs. Suman for the Assessment Year 2011-12

Particulars Amount (`)

Residential house exempt under section 5(vi) Exempt

Motor Car for Business use 10,00,000

Land in Urban area 35,00,000

Cash in hand in excess of ` 50,000 75,000

Cash at bank not an asset Not an asset

Land in rural area within 5 km from Delhi 5,00,000

Jewellery 14,80,000

Farm house outside 30 km from local limits of Municipality exempt

Let out house rented for 330 days during the previous year

[not an asset as per section 2(ea)] exempt

Gross Wealth 65,55,000

Less : Loan taken to purchase the urban land 5,00,000

Net wealth 60,55,000

Wealth tax @1% on (60,55,000 – 30,00,000) 30,550

Question 5

(a) Write short notes on any three of the following :

(i) Deduction in respect of interest on loan taken for higher education.

(ii) Treatment of agricultural income for tax purposes.

(iii) Circumstances in which best judgment assessment is made by theassessing officer.

(iv) Consequences of failure to deduct tax at source.

(v) Assets exempt from tax as per section 5 of the Wealth-tax Act, 1957.(3 marks each)

(b) Anurag owns three houses, the particulars of which are given below :

House-A House-B House-C(` ) (` ) (` )

Municipal value 80,000 1,20,000 1,00,000

Fair rent 90,000 1,00,000 1,10,000

Monthly rent 8,000 9,000 12,000

Rent collection charges 8,000 10,000 6,000

Repair expenses 5,000 6,000 4,000


Interest on loan :

– For construction 40,000 — —

– For marriage of son — 30,000 —

– For repairs — — 8,000

Commencement of construction 04.04.2003 04.01.2005 04.07.2006

Completion of construction 31.03.2007 30.06.2007 31.12.2008

Use by tenant Residential Office Residential

Municipal tax is charged @ 10%. Anurag paid municipal tax of House-Abut did not pay municipal tax of House-B. The tenant paid the municipaltax of House-C which remained vacant for 3 months.

Compute income from house property of Anurag for the assessment year2011-12. (6 marks)

Answer 5(a)(i)

Deduction for entire amount of interest paid on a loan taken for pursuing highereducation [section 80E]

The deduction is available only to individual assessee. The individual must havetaken a loan from any financial institution or any approved charitable institution. Theloan must have been taken for pursuing higher education. Such education must be ofassessee himself or any of his relatives. The deduction shall be allowed only in respectof any sum paid by him, in the previous year by way of interest on such loan. Suchamount should be paid out of his income chargeable to tax.

The whole of the amount paid during previous year towards interest is allowed asdeduction and deduction shall be allowed for eight assessment years starting from theassessment year in which the assessee starts paying the interest on loan, or until theinterest thereon is paid by the assessee in full, whichever is earlier.

Answer 5(a)(ii)

There is no tax on agricultural income but if an assessee has non-agricultural incomeas well as agricultural income, such agricultural income is included in his total incomefor the purpose of computation of Income-tax on non-agricultural income. This is alsoknown as partial integration of agricultural income with non-agricultural income or indirectway of taxing agricultural income. Such partial integration is done only in the case ofindividual, HUF, AOP/BOI taxable at normal slab rate and artificial juridical person. It isnot done in the case of firm, company, co-operative society and local authority.

The partial integration is done to compute the tax on non-agricultural income onlywhen the following two conditions are satisfied:

(i) Non-agricultural income of the assessee exceeds the maximum exemption limitwhich for assessment year 2011-12 is Rs.1,60,000 in the case of an individual(other than senior citizen and woman) and HUF, etc; and

(ii) The Net Agricultural Income exceeds ` 5,000.


Answer 5(a)(iii)

The Assessing Officer, after taking into account all relevant material which he hasgathered, is under an obligation to make an assessment of the total income or loss tothe best of his judgment and determine the tax payable by the assessee in the followingcases:

(a) Where any person fails to make the return under section 139(1) and has notmade a return or a revised return under section 139(4) or section 139(5);

(b) Where any person fails to comply with all the terms of a notice issued underSection 142(1); or fails to comply with the directions issued undersection 142(2A) for getting the account audited;

(c) Where any person, having made a return, fails to comply with all the terms of anotice issued under section 143(2).

Answer 5(a)(iv)

Consequences of failure to deduct tax at source

Where any person, including the principal officer of a company:

(a) who is required to deduct any sum in accordance with the provisions of this Act; or

(b) referred to in section 192(1A), being an employer does not deduct, or does notpay, or after so deducting fails to pay, the whole or any part of the tax, asrequired by or under this Act, then, such person, shall, without prejudice toany other consequences which he may incur, be deemed to be an assesseein default in respect of such tax and hence shall be liable to penalty undersection 221.

However, no penalty shall be charged under section 221 from such person unlessthe Assessing Officer is satisfied that such person has without good and sufficientreasons failed to deduct and pay the tax and hence shall be liable to penalty undersection 221.

Answer 5(a)(v)

The following assets are exempt under section 5 of the Wealth Tax Act, 1957

1. Property held under a trust [Section 5(i)]

Any property (i.e. six assets) held by the assessee under trust or other legalobligation for any public purpose of charitable or religious nature in India isexempt from tax. However, this exemption is subject to the provisions ofSection 21A, which has an over-riding effect on Section 5(i).

2. Interest in the coparcenary property of the HUF [Section 5(ii)]

As the Hindu Undivided Family is itself a unit for taxation under the Wealth-taxAct, the interest of the assessee in the coparcenary property of any HinduUndivided Family of which he is a member, shall be exempt.

3. One Official residence of a Ruler [Section 5(iii)]

The erstwhile Ruler of an Indian State has been given an exemption in respect


of any one building in his occupation, being a building which has been declaredby the Central Government as his official residence, immediately before thecommencement of the Constitution (Twenty Sixth Amendment) Act, 1971.

4. Heirloom Jewellery of an erstwhile Ruler [Section 5(iv)]

A former Ruler is entitled to an exemption in respect of Jewellery in his possessionprovided the following conditions are satisfied:

(i) Such Jewellery should not be his personal property;

(ii) Such Jewellery must have been recognized before 1.4.1957 by the CentralGovernment as his heirloom; or where no such recognition exists, it musthave been recognized by the CBDT as his heirloom Jewellery at the time ofhis first wealth-tax assessment.

5. Money and the assets brought into India by citizen of India or person of IndianOrigin [Section 5(v)]

An assessee who is an individual is entitled to exemption under this clause inrespect of any money or asset brought into India provided the following conditionsare satisfied:

(i) Such individual should be a citizen of India or a person of Indian origin;

(ii) He was ordinarily residing in a foreign country;

(iii) He, on leaving such country, has returned to India with the intention ofpermanently residing in India.

6. One house or part of a house [Section 5(vi)]

Exemption under this clause is allowed only to individual and HUF assessee.The exemption is allowed in respect of:

(i) One house; or

(ii) A part of the house; or

(iii) A plot of land exceeding 500 sq. mts.

Answer 5(b)Computation of Income from House Property

of Mr. Anurag for the Assessment Year 2011-12

Particulars Amount (`) Amount (`) Amount (`)House A House B House C

Gross Annual Value 96,000 1,20,000 1,10,000

Less : Municipal Taxes 8,000 — —

Annual Value 88,000 1,20,000 1,10,000

Less : Deductions u/s 24 :Standard Deduction (30%) 26,400 36,000 33,000

Interest on Loan 40,000 — 8,000

Income from HP 21,600 84,000 69,000

Total Income from House Property (21,600+84,000+69,000) is ̀ 1,74,600.


Notes:

(i) No deduction is available in respect of (1) rent collection charges and repairexpenses

(ii) Interest on loan obtained for the marriage of son is not deductible.

(iii) It is assumed that the interest is for current year.

Question 6

(a) Mahender is the karta of a Hindu Undivided Family (HUF). Compute thetaxable income of the family and amount of tax payable by it on the basisof the following particulars for the year ended 31st March, 2011 :

(i) Income from house property : The family uses its ancestral house forresidence; the municipal value of the house is `60,000 per annum andinterest on loan borrowed for the house has accrued to the tune of`22,000.

The family owns another house which is let-out for `8,000 p.m. Thefamily made payment in respect of municipal taxes for the threeprevious years 2008-09 to 2010-11 during the current previous year2010-11 itself equal to `12,000 for the let-out house.

(ii) Income from family business : Net income of the family businessafter charging salary amounting to `1,20,000 of karta is `4,00,000. Italso incurred/earned the following items of losses, expenses andincomes :

`Loss on horse race 4,000

Winnings from lotteries 20,000

Profit on speculation in silver 18,000

Loss on speculation in gold 6,000

Life insurance premium on the life of family members 12,000

Donation to National Defence Fund 10,000

Donation to other approved bodies 50,000

(iii) Income form other sources :

Interest on maturity of NSCs, VIII Issue 12,500

Dividend received from an Indian company (gross) 15,000

Collection charges paid for dividend 400

(10 marks)

(b) Discuss the procedure of regular assessment under the Income-tax Act,1961. (5 marks)


Answer 6(a)

Computation of Taxable Income & Tax liability ofMr. Mahender’s HUF for the Assessment Year 2011-12

Particulars ` ` Amount (`)

Income from House Property :Gross Annual Value 96,000Less : Municipal Taxes 12,000Annual Value 84,000Less : Standard deduction under section 24(30%) 25,200

58,800Loss on self occupied property 22,000

Income from House Property 36,800Income from Business :Net Income from family business 4,00,000Profit from speculation in Silver 18000Less : Loss from speculation in Gold 6000 12,000

Income from business 4,12,000Income from other sources : Loss from Horse Race (not allowed to be set off) (4,000)Winning from Lotteries 20,000Interest on NSC VIII Issue 12,500Dividend received from an Indian company Exempt

Income from other sources 32,500Gross Total Income 4,81,300Less : Deductions :Under section 80C(Life insurance Premium) 12,000Under section 80G 33,465 45,465[10000 on NDF + 23,465(50% of 46,930)

Total Income 4,35,835(Rounded off) 4,35,840

Amount of Tax

Up to ` 1,60,000 NIL

From 1,60,001 to ̀ 4,15,840 @10% 25,584Winnings from lotteries @30% 6,000

Tax Payable 31,584Add : EC & SHEC (3%) 948

Total Tax Payable 32,531

(Rounded off) 32,530


Notes :

(i) Interest on loan borrowed in respect of self-occupied house which shall be allowedas deduction.

(ii) Entire amount paid by way of municipal taxes during the previous year isdeductible.

(iii) Loss on horse races is to be carried forward to next year.

(iv) Deduction in respect of donation to other approved bodies is available to 10% ofadjusted Gross Total Income (GTI) which is Rs.4,69,300 (GTI minus deductionunder section 80C). Further, total amount donated towards National DefenceFund qualifies for deduction i.e. 100%.

(vi) Dividends from Indian company are exempt from tax; deduction for collectioncharges is also not available.

Answer 6(b)

Where the return has been made under section 139 or in response to a notice undersection 142(1), the Assessing Officer shall if he considers it necessary or expedient toensure that:

(i) the assessee has not understated the income; or

(ii) has not computed excessive loss; or

(iii) has not underpaid the tax in any manner,

serve a notice on the assessee under section 143(2) requiring him to attend his office orproduce or cause to be produced any evidence on which the assessee may rely insupport of the return on a date to be specified in the notice.

However, no notice under section 143(2) shall be served on the assessee after theexpiry of 6 months from the end of the financial year in which the return is furnished.

The Assessing Officer, on the day specified in the notice under section 143(2) or assoon afterwards, as may be, shall, by order in writing, make an assessment of the TotalIncome or the loss of the assessee and determine the sum payable by him or refund ofany amount due to him on the basis of such assessment. The assessment shall bemade after taking into consideration the following:

(i) Such evidence as the assessee may produce on the dates specified, from timeto time and such other evidence as the Assessing Officer may require onspecified points;

(ii) All relevant material gathered by him.

PART BQuestion 7


(i) What are the various provisions relating to payment of service tax ?Explain. (5 marks)


(ii) What are the provisions regarding penalties under service tax in thefollowing cases :

(a) Failure to take registration.

(b) Failure to keep books of account.

(c) Failure to produce accounts and documents. (5 marks)

(iii) “The value of any taxable service shall be the gross amount charged bythe service provider for such service rendered by him”. In the light ofthis statement, explain how the value of taxable service is determined.

(5 marks)

(iv) Re-write the following sentences after filling-in the blank spaces withappropriate word(s)/figure(s) :

(a) Rate of service tax payable for the financial year 2010-11 is per cent.

(b) Maximum amount of penalty for late filing of service tax return is` .

(c) Under service tax rules, every assessee is required to furnishto at the time of filing his return for the first time alist of all accounts maintained in relation to the service tax.

(d) Service tax in India is levied by .

(e) Service tax return can be revised within a period of from the date of submission of return. (1 mark each)

(v) State, with reasons in brief, whether the following statements are true orfalse :

(a) Service tax in India is levied under a separate enactment.

(b) The Central Excise Officer is empowered to impose penalty underservice tax.

(c) The Central Government has exempted some of the taxable services.

(d) Recovery and adjustment of service tax means the same thing.

(e) Service tax is administered by service tax department.(1 mark each)

Answer 7(i)

The service tax shall be paid to the credit of Central Government:

(i) by the 6th day of the month, if the tax is deposited electronically through internetbanking; and

(ii) by the 5th day of the month in any other case,

immediately following the calendar month in which the service is deemed to be providedas per the rules framed in this regard.

Provided that where the assessee is an individual or proprietary firm or partnershipfirm, the service tax shall be paid to the credit of the Central Government by the 6th dayof the month if the tax is deposited electronically through internet banking, or, in any


other case, the 5th day of the month, as the case may be, immediately following thequarter in which the service is deemed to be provided as per the rules framed in thisregard.

Provided also that the service tax on the services deemed to be provided in themonth of March, or the quarter ending in March, as the case may be shall be paid to thecredit of the Central Government by the 31st day of March of the calendar year.

Answer 7(ii)

(i) Any person who is liable to pay service tax or required to take registration, failsto take registration in accordance with the provisions of section 69 or rulesmade under this Chapter shall be liable to pay a penalty which may extend toten thousand rupees or two hundred rupees for every day during which suchfailure continues, whichever is higher, starting with the first day after the duedate, till the date of actual compliance.

(ii) Any person who fails to keep, maintain or retain books of account and otherdocuments, as required in accordance with the provisions of this Chapter or therules made thereunder shall be liable to a penalty which may extend to tenthousand rupees.

(iii) Any person who fails to produce documents called for by a Central ExciseOfficer in accordance with the provisions of this Chapter or rules made thereundershall be liable to a penalty which may extend to ten thousand rupees or twohundred rupees for every day during which such failure continues, whichever ishigher starting with the first day after the due date till the date of actualcompliance.

Answer 7(iii)

Under Section 67, service tax shall be chargeable on any taxable service withreference to its value. Such value will be as follows:

(1) in a case where the provision of service is for a consideration in money, be thegross amount charged by the service provider for such service provided or to beprovided by him;

(2) in a case where the provision of service is for a consideration not wholly orpartly consisting of money, the value of taxable service shall be determined bythe service provider in the following manner:–

(a) the value of such taxable service shall be equivalent to the gross amountcharged by the service provider to provide similar service to any other personin the ordinary course of trade and the gross amount charged is the soleconsideration;

(b) where the value cannot be determined in accordance with clause (a), theservice provider shall determine the equivalent money value of suchconsideration which shall, in no case be less than the cost of provision ofsuch taxable service.

(3) Where the gross amount charged by a service provider, for the service provided


or to be provided is inclusive of service tax payable, the value of such taxableservice shall be such amount as, with the addition of tax payable, is equal to thegross amount charged.

(4) The gross amount charged for the taxable service shall include any amountreceived towards the taxable service before, during or after provision of suchservice.

(5) The gross amount shall include any expenditure or cost incurred by the serviceprovider. However, the expenditure incurred as a pure agent of the service receivershall not form part of the value of taxable services.

Answer 7(iv)

(a) Rate of service tax payable for the financial year 2010-11 is 10 per cent.

(b) Maximum amount of penalty for late filing of service tax return is `20,000.

(c) Under service tax rules, every assessee is required to furnish toSuperintendent of Central Excise at the time of filing his return for thefirst time a list of all accounts maintained in relation to the service tax.

(d) Service tax in India is levied by Central Government .

(e) Service tax return can be revised within a period of 90 days from thedate of submission of return.

Answer 7(v)

(a) False, service tax in India is not levied under a separate enactment it is leviedunder Chapter V of Finance Act, 1994.

(b) True, under section 83A of the Finance Act, 1994 the Central Excise Officerhas the power of adjudication conferred by the CBEC.

(c) True, the Central Government by virtue of Notification no. 22/2006-service taxdated 31.5.2006 exempted some of the taxable services from the whole of theservice tax leviable thereon under section 66 of the Finance Act,1994.

(d) False, the recovery of service tax is made where the Central Excise Officerserves a notice for the amount of service tax which has not been levied or paidor has been short levied or short paid or enormously refunded. On the otherhand, the adjustment of service tax means the adjustment of excess amount ofthe service tax paid by assessee against his service tax liability on the succeedingmonth or quarter.

(e) False, service tax is administered by Central Board of Excise & Customs (CBEC).

PART CQuestion 8


(i) What is ‘white paper’ ? What are the different parts of white paper undervalue added tax (VAT) ?


(ii) Explain the procedure of computation of VAT liability of a dealer.

(iii) Write a note on certification by professionals under VAT system.

(iv) Explain the audit procedure applicable under the VAT system.

(v) “Input tax credit in relation to any period means setting off the amountof input tax by a registered dealer against the amount of his output tax.”Explain. (5 marks each)

Answer 8(i)

The empowered committee of the State Finance Ministers constituted by the Ministryof Finance, Government of India on the basis of the resolution adopted in the conferenceof the Chief Ministers on November 16, 1999 under the chairmanship of Dr. Asim Dasguptacame out with a white paper on state level VAT, which was released on January 17,2005 by Shri P Chidambaram, The Finance Minister, Government of India on thisoccasion the Finance Minister remarked:

This is the first document which have been collectively prepared and put out to thepeople of the country by the Finance Ministers of all states…. We have formed therainbow coalition to undertake one of the biggest tax reforms”.

This paper consists of three parts. In Part I Justification of VAT and the backgroundhas been mentioned. In Part II main design of VAT as evolved on the basis of consensusamong the states through repeated discussions in the Empowered Committee has beenelaborated and in Part III other related issues for effective implementation of VAT havebeen discussed.

Answer 8(ii)

The VAT is based on value addition to the goods and the related VAT liability iscalculated as follows:

(a) The VAT Liability will be self-assessed by the dealer on the basis of the recordsmaintained.

(b) The liability is determined after deducting input tax credit. Input tax credit isgenerally given for the entire VAT paid within the state on purchases of taxablegoods meant for resale/manufacture of taxable goods.

(c) If the tax credit exceeds the amount of tax payable on sales in a tax period itshall be carried over to the next period. If there is any excess unadjusted inputtax credit at the end of the financial year it shall be eligible for refund.

(d) This input tax credit is given to both manufacturers and traders for purchase ofinput/supplies meant for both sales within the state as well as the other statesirrespective of their date of utilisation or sale.

(e) For all exports made out of the country tax paid within the state will be refundedin full.

(f) Tax paid on inputs procured from other states through interstate sale shall notbe eligible for credit.


Answer 8(iii)

As we know that the VAT system in India is not unique and every state and unionterritories have its own VAT Act or Rules. Considering this situation in general terms aprofessional including a Company Secretary has to see that all documents to be filedbefore VAT authorities are correct or not specially the tax calculation sheet, TIN or GRNNo. etc. Apart from this the professionals has to see that returns to be filed before VATauthorities are made as per the prescribed rules. He should take into consideration theprocedural aspect regarding payment of VAT and related assessment proceedings.

As a professional the Company Secretary has to see that whether the dealer hasmaintained the records and documents required under the Act. He has to advice theconcerned client the provisions relating to appeals and revisions if any matter relating toVAT proceedings. He should be well versed with the technical aspect in dealing withseizure and confiscation proceedings before Judicial or quasi-judicial bodies.

The professional are authorised to conduct audit of accounts maintained by thedealers under the various VAT States Act.

Answer 8(iv)

Audit under VAT has been made compulsory by various states. There shall nolonger be compulsory assessment at the end of each year. Correctness of self-assessment shall be checked through a system of Department Audit. A certainpercentage of the dealers shall be taken up for audit every year on a scientific basis. Incase of detection of evasions during the course of audits, the concerned dealer may betaken up for audit for previous periods. This Audit Wing shall remain delinked from taxcollection wing to remove any bias. The audit team shall conduct its work in a timebound manner and audit shall be completed within six months and the audit report shallbe transparently sent to the dealer as well.

Simultaneously, a cross-checking through computerized system shall be done onthe basis of coordination between the tax authorities of the State Governments and theauthorities of Central Excise to compare constantly the tax returns and set-off documentsof VAT system of the States and those of Central Excise. This comprehensive cross-checking system shall help reduction in tax evasions and also lead to significant growthof tax revenue.

Answer 8(v)

VAT is based on the value addition to the goods and the related VAT liability of thedealer is computed by setting off the amount of input tax credit from the amount of taxcollected on sales during the period of payment. The speciality of VAT lies in deductingthe amount of tax paid earlier through the system of input tax credit. Thus, it is rightlysaid that input tax credit in relation to any period means setting off the amount of inputtax by a registered dealer against the amount of his output tax.

Input tax credit is available, generally, for the amount of VAT paid within a state onpurchases of taxable goods intended for resale or manufacture of taxable goods.However, credit is generally not available in respect of the following purchases:

(a) Goods purchased from unregistered dealers;


(b) Goods purchased from other states/countries;

(c) Purchase of goods used in manufacture of exempted goods;

(d) Purchased of goods used as fuel in power generation;

(e) Purchase of capital goods (in some cases credit is available in instalments);

(f) Purchase of goods to be despatched as branch transfers outside states;

(g) Purchase of goods in cases where the dealer does not have invoices showingamounts of tax charged separately by the selling dealer;

(h) Purchase from a dealer who has opted for composition scheme;

(i) Purchase of non-creditable goods.

GUIDELINE ANSWERS

EXECUTIVE PROGRAMME

DECEMBER 2011

MODULE II

GUIDELINE ANSWERS

EXECUTIVE PROGRAMME

DECEMBER 2011

MODULE II

ICSI House, 22, Institutional Area, Lodi Road, New Delhi 110 003Phones : 41504444, 45341000; Fax : 011-24626727E-mail : [email protected]; Website : www.icsi.edu

These answers have been written by competent persons andthe Institute hopes that the GUIDELINE ANSWERS will assistthe students in preparing for the Institute's examinations. It is,however, to be noted that the answers are to be treated asmodel answers and not as exhaustive and the Institute is notin any way responsible for the correctness or otherwise of theanswers compiled and published herein.

C O N T E N T S

Page

MODULE II

1. Company Law ... 1

2. Economic and Labour Laws ... 20

3. Securities Laws and Compliances ... 44

The Guideline Answers contain the information based on theLaws/Rules applicable at the time of preparation. However,students are expected to be well versed with the amendmentsin the Laws/Rules made upto six months prior to the date ofexamination.

© THE INSTITUTE OF COMPANY SECRETARIES OF INDIA

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Printed at Samrat Offset Works/4,000/January 2012

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NOTE : Guideline Answers of the last Four Sessions need to be updated in the light ofchanges and references given below :

EXECUTIVE PROGRAMME

UPDATING SLIP

COMPANY LAW

MODULE – II – PAPER 1

Examination Question No. Updation required in the answerSession

June 2010 to Dec. 2011 — The Ministry of Corporate Affairs hasissued a number of circulars andnotifications during the year 2011. Theseare placed at the website of Ministry at thefollowing address

http : //www.mca.gov.in/Ministry/Companies_act.html.

Students are advised to go through eachand every circular and notification to updatethemselves.

(i)

UPDATING SLIP

ECONOMIC AND LABOUR LAWS

MODULE – II – PAPER 2

Examination Question No. Updation required in the answerSession

June 2009 to Dec. 2010 — Foreign Trade Policy 2009-14.

— FDI Policy issued by DIPP effectivefrom October, 2011.

— Competition Act, 2002 as amended in2009 and 2011.

— National Green Tribunal Act, 2010.

— Legal Metrology Act, 2009 and Rulesmade thereunder.

— Foreign Contribution (Regulation) Act,2010.

NOTE : Guideline Answers of the last Four Sessions need to be updated in the light ofchanges & references given below :

(ii)

1 EP–CL– December 2011

EXECUTIVE PROGRAMME

DECEMBER 2011

COMPANY LAWTime allowed : 3 hours Maximum marks : 100

NOTE : 1. Answer SIX questions including Question No. 1 which is COMPULSORY.

2. All references to sections relate to the Companies Act, 1956 unless statedotherwise.

Question 1

;

Comment on any four of the following :

(i) Every company intending to invite deposits from public under section 58Amust issue an advertisement which shall be signed by all the directors ofthe company.

(ii) Doctrine of constructive notice seeks to protect the company against theoutsiders.

(iii) Board meetings of the company to be held at the registered office of thecompany during the working hours on a day that is not a public holiday.

(iv) Dividend can be paid out of capital if the articles of association authorisesuch payment.

(v) Director Identification Number (DIN) is not mandatory for directors offoreign company having branch offices in India. (5 marks each)

Answer 1(i)

Prior to the commencement of the Amendment Rules, 1978, the Companies(Acceptance of Deposits) Rules, 1975 required that the advertisement should be signedby all the directors of the company, which created operational difficulties. Therefore, therule was amended to provide that on or before the date of issue, the advertisementshould be signed by a majority of the directors of the company as constituted at the timethe Board approved the advertisement or their duly authorised agent in writing and acopy of the same should be delivered to the Registrar for registration. Even a letter ofauthority is sufficient for this purpose and power of attorney is not necessary [CircularNo. 23/75 (91/14/75-CL.XIV) dated 25.9.1975 of the Department of Company Affairs].

Answer 1(ii)

The doctrine of constructive notice seeks to protect the company against theoutsiders. The doctrine of constructive notice assumes that the person has been notified,whether they know it or not. Notification doesn’t necessarily mean that this person hasbeen specifically notified, only that this information is available to the public.

The memorandum and articles, when registered, become public documents and canbe inspected by anyone on payment of nominal fee. Therefore, every person whocontemplates entering into a contract with a company has the means of ascertaining

1

EP–CL– December 2011 2

and is consequently presumed to know, not only the exact powers of the company butalso the extent to which these powers have been delegated to the directors, and of anylimitations placed upon the exercise of these powers. In other words, every persondealing with the company is deemed to have a “constructive notice” of the contents ofits memorandum and articles. Consequently, if a person enters into a contract which isbeyond the powers of the company, as defined in the memorandum, or outside the limitsset on the authority of the directors, he cannot, as a general rule, acquire any rightsunder the contract against the company.

Outsiders dealing with incorporated bodies are bound to take notice of limits imposedon the corporation by the memorandum or other documents of constitution. Neverthelessthey are entitled to assume that the directors or other persons exercising authority onbehalf of the company are doing so in accordance with the internal regulations as set outin the Memorandum & Articles of Association.

Answer 1(iii)

Unlike the provisions of Section 166, which require the Annual General Meeting ofthe company to be held at the registered office of the company during the working hoursand on a day that is not a public holiday, there are no such restrictions in the Actregarding the meeting of the Board of directors. The meetings of the Board of directorsmay, therefore, be held at any place convenient to the Directors outside the businesshours and even on a public holiday unless the articles provide otherwise.

It has to be noted that there is no restriction regarding the holding of Board meetingson any day, even if it be public holiday unless the articles provide otherwise. But if, forwant of quorum, a Board meeting has to be adjourned to the same day next week asrequired by Sub-section (1) and if that day happens to be a public holiday, the adjournedmeeting should be held on the next day succeeding the holiday or if that is a publicholiday, till the next succeeding day which is not a public holiday at the same time andplace. The Department has clarified in connection with Section 285 that it would notraise any objection if an adjourned Board meeting is held on ‘a public holiday, for theconvenience of the directors although it considers that an original meeting should alsonormally be held only on working day. [(Letter No 8/11 (285) 63-PR dated 2-1-1963].

Answer 1(iv)

Dividend cannot be paid out of capital, even if the articles of association authorisesuch payment. As per Section 205, dividend may be paid out of the following threesources only:

— out of current profits;

— out of profits for any previous financial year or years; and

— out of moneys provided by the Central or State Government for the payment ofdividend.

Directors who knowingly paid dividends out of capital shall be held personally liableto make good the amount to the company. When a misrepresentation was made to theshareholders by the directors that the dividends were being paid out of profits while theywere actually paid out of capital, the shareholders would not be accountable and the


directors alone would be accountable to the company [Oxford Benefit Building &Investment Society, In re (1886) 35 Ch. D].

However, interest may be paid out of capital, on the shares of the company, with theprevious approval of the Central Government under Section 208.

Answer 1(v)

Rule 3 of Companies (Director Identification Number) Rules, 2006, provides thatevery individual, who is an existing director or intending to be appointed as director of acompany shall apply for allotment of DIN.

Company is defined under section 3 of the Companies Act, 1956 means a companyformed and registered under this Act or existing company.

Therefore, DIN Rules are not applicable to directors of foreign company. So, it is notmandatory for directors of foreign company having branch office in India to get DirectorIdentification Number.

Question 2

(a) Write the most appropriate answer from the given options in respect of thefollowing :

(i) The privilege of doing business under the corporate form of organisationis —

(a) Limited liability for business debt

(b) Unlimited liability for business debt

(c) No liability for business debt


(ii) The question of provisional contract does not arise as the companycommences business immediately on its incorporation in case of —

(a) A public company

(b) A private company

(c) Both (a) and (b)


(iii) The money paid by the subscribers must be returned forthwith, if theminimum subscription is not raised within ––

(a) 30 Days after the issue of the prospectus

(b) 60 Days after the issue of the prospectus

(c) 120 Days after the issue of the prospectus

(d) 180 Days after the issue of the prospectus.

(iv) In the absence of a valid nomination, on the death of a sole ownerof shares, the rights and liabilities go in favour of the —

(a) Company

(b) Government


(c) Registrar of Companies

(d) Legal heirs.

(v) Appointment of an alternate director is the prerogative of the —

(a) Board of directors

(b) Shareholders

(c) Government

(d) None of the above.(vi) Section 226 containing provisions about qualifications and

disqualifications of auditors is applicable to —(a) Public companies(b) Private companies(c) Section 25 companies(d) All companies.

(vii) According to section 294, no company shall appoint a sole sellingagent for any area for a term exceeding —

(a) 2 Years

(b) 3 Years(c) 5 Years


(viii) Which of the following court is empowered to supervise theimplementation of the scheme of compromise and arrangement undersection 392 —

(a) Supreme Court

(b) High Court

(c) Sessions Court



(i) A company being a legal entity must have a of itsown to establish its separate identity.

(ii) means a prospectus issued by any financial institutionor bank for one or more issues of securities or class of securitiesspecified in the prospectus.

(iii) Where a company borrows without the authority conferred on it by itsarticles or beyond the amount set-out in the articles, it is an

borrowing.

(iv) A is a security given for securing loans or debenturesby way of a mortgage on the assets of the company.

(v) The Depositories Act, 1996 specifies that all held ina depository are fungible.


(vi) A director can act for months without possessing thequalification shares.

(vii) For any public deposit matured and claimed but remaining unpaid, thecompany should pay a penal interest of per annumfor overdue period.

(viii) means the profits which the law allows the companyto distribute by way of dividend. (1 mark each)

Answer 2(a)(i)

(a) Limited liability for business debt.

Answer 2(a)(ii)

(b) A private company.

Answer 2(a)(iii)

(c) 120 days after the issue of the prospectus.

Answer 2(a)(iv)

(d) Legal heirs.

Answer 2(a)(v)

(a) Board of Directors

Answer 2(a)(vi)

(d) All companies.

Answer 2(a)(vii)

(c) 5 years.

Answer 2(a)(viii)

(b) High Court.

Answer 2(b)

(i) A company being a legal entity must have a name of its own to establishits separate identity.

(ii) Shelf Prospectus means a prospectus issued by any financial institutionor bank for one or more issues of securities or class of securitiesspecified in the prospectus.

(iii) Where a company borrows without the authority conferred on it by itsarticles or beyond the amount set-out in the articles, it is an ultra-viresborrowing.

(iv) A charge is a security given for securing loans or debentures by way ofa mortgage on the assets of the company.

(v) The Depositories Act, 1996 specifies that all securities held in adepository are fungible.


(vi) A director can act for two months without possessing the qualificationshares.

(vii) For any public deposit matured and claimed but remaining unpaid, thecompany should pay a penal interest of 18% per annum for overdueperiod.

(viii) Divisible profits means the profits which the law allows the company todistribute by way of dividend.

Question 3

Write notes on any four of the following :

(i) Conclusive evidence

(ii) True and fair view

(iii) Digital signature

(iv) Essentials of a mortgage

(v) Divisible profits

(vi) Independent director. (4 marks each)

Answer 3(i)

Conclusive evidence

According to Section 35 of the Act, a Certificate of Incorporation given by the Registrarin respect of any association shall be conclusive evidence that all the requirements ofthe Act have been complied with in respect of registration and matters precedent andincidental thereto, and that the association is a company authorised to be registered andduly registered under the Act. The Certificate of Incorporation is conclusive evidencethat everything is in order as regards registration and that the company has come intoexistence from the earliest moment of the day of incorporation stated therein with rightsand liabilities of a natural person, competent to enter into contracts [Jubilee Cotton MillsLtd. v. Lewis, (1924) (A.C. 958)]. The validity of the registration cannot be questionedafter the issue of the certificate.

Answer 3(ii)

True and fair view

The annual accounts of the company should not only be made in the prescribedformat and in accordance with the requirements of the law but should also give the trueand fair view of the affairs and working of the company. Every information which isconsidered relevant and necessary should be disclosed even if it is not specificallyrequired by the law to be shown. The information should be given unambiguously; inclear and precise terms and should be according to the commonly accepted accountingpolicies.

The auditor in his report under section 227(2) of the Companies Act, 1956 is requiredto state as to whether in his opinion and to the best of his information, the accounts ofthe company give a true and fair view of the affairs of the company.


Answer 3(iii)

Digital Signature

The Information Technology Act, 2000 provides for use of Digital Signatures on thedocuments submitted in electronic form in order to ensure the security and authenticityof the documents filed electronically. This is the only secure and authentic way that adocument can be submitted electronically. As such, all filings done by the companiesunder MCA21 e-Governance programme are required to be filed with the use of DigitalSignatures by the person authorised to sign the documents.

Section 2(p) of the Information Technology Act, 2000 defines the term ”digitalsignature” to mean authentication of any electronic record by a subscriber by means ofan electronic method or procedure in accordance with the provisions specified.

One can use only the valid Digital Signatures issued to the person. It is illegal to useDigital Signatures of anybody other than the one to whom it is issued.

Answer 3(iv)

Essentials of a Mortgage

1. Transfer of Interest : The first thing to note is that a mortgage is a transferof interest in the specific immovable property. The mortgagor as an owner ofthe property possesses all the interests in it, and when he mortgages theproperty to secure a loan, he only parts with a part of the interest in that propertyin favour of the mortgagee. After mortgage, the interest of the mortgagor isreduced by the interest which has been transferred to the mortgagee. Hisownership has become less for the time being by the interest which he hasparted with in favour of the mortgagee. If the mortgagor transfers this property,the transferee gets it subject to the right of the mortgagee to recover from itwhat is due to him i.e., the principal plus interest.

2. Specific Immovable Property : The second point is that the property must bespecifically mentioned in the mortgage deed. Where, for instance, the mortgagorstated “all of my property” in the mortgage deed, it was held by the Court thatthis was not a mortgage. The reason why the immovable property must bedistinctly and specifically mentioned in the mortgage deed is that, in case themortgagor fails to repay the loan the Court is in a position to grant a decree forthe sale of any particular property on a suit by the mortgagee.

3. To Secure the Payment of a Loan : Another characteristic of a mortgage is thatthe transaction is for the purpose of securing the payment of a loan or theperformance of an obligation which may give rise to pecuniary liability. It maybe for the purpose of obtaining a loan, or if a loan has already been granted tosecure the repayment of such loan. There is thus a debt and the relationshipbetween the mortgagor and the mortgagee is that of debtor and creditor. WhenA borrows 100 bags of paddy from B on a mortgage and agrees to return anequal quantity of paddy and a further quantity by way of interest, it is a mortgagetransaction for the performance of an obligation.


There are three outstanding characteristics of a mortgage:

(a) The mortgagee’s interest in the property mortgaged terminates upon theperformance of the obligation secured by the mortgage.

(b) The mortgagee has a right of foreclosure upon the mortgagor’s failure to perform.

(c) The mortgagor has a right to redeem or regain the property on repayment of thedebt or performance of the obligation.

Answer 3(v)

‘Divisible profits’ means the profits which the law allows the company to distributeto the shareholders by way of dividend. According to Palmer’s Company Law, the terms‘divisible profits’ and ‘profits in the legal sense’ are synonymous. The profits of a businessmean the net proceeds of the concern after deducting the necessary outgoings withoutwhich those proceeds could not be earned. [Bharat Insurance Co. Ltd. v. CIT (1931) 1Com. Cases 192, 196 (Lah)]. ‘Profits available for dividend’ has been held to mean theprofits which the directors consider should be distributed after making provision fordepreciation or past losses, for reserves or for other purposes.

Answer 3(vi)

Independent Director

Clause 49 of the listing agreement defines independent directors as follows: “For thepurpose of this clause the expression ‘independent directors’ shall mean a non-executivedirector of the company who:

(a) apart from receiving director’s remuneration, does not have any material pecuniaryrelationships or transactions with the company, its promoters, its directors, itssenior management or its holding company, its subsidiaries and associateswhich may affect independence of the director;

(b) is not related to promoters or persons occupying management positions at theboard level or at one level below the board;

(c) has not been an executive of the company in the immediately preceding threefinancial years;

(d) is not a partner or an executive or was not partner or an executive during thepreceding three years, of any of the following:

(i) the statutory audit firm or the internal audit firm that is associated with thecompany, and

(ii) the legal firm(s) and consulting firm(s) that have a material association withthe company.

(e) is not a material supplier, service provider or customer or a lessor or lessee ofthe company, which may affect independence of the director.

(f) is not a substantial shareholder of the company i.e. owning two percent or moreof the block of voting shares.

(g) is not less than 21 years of age.


Question 4

(a) Define ‘oppression and mismanagement’. What are the powers of the Governmentof India to prevent oppression and mismanagement ? (8 marks)

(b) What are the objects of Multi-State Cooperative Society ? (8 marks)

Answer 4(a)

The words ‘oppression and mismanagement’ are not defined in the Act. The wordoppression has been explained in a case by the Supreme Court as –

“the essence of the matter seem to be that the conduct complained of should at thelowest, involve a visible departure from the standards for fair dealing, on which everyshareholder who entrusts his money to the company is entitled to rely.”

The term mismanagement means any act on the part of management which isregarded as injury to the interest of the company or public interest.

“Oppression must be a continuous process. This is suggested by the words, ‘arebeing conducted in a manner...’ used in Section 397. Hence isolated acts of oppressionor mismanagement will not give rise to an action under Section 397 of the Act.

Powers of the Central Government to prevent Oppression or Mismanagement

1. The Central Government may appoint such number of persons specified in writingto hold office as directors thereof as is necessary to effectively safeguard theinterests of the company, its shareholders or the public interest, for such period,not exceeding 3 years on any one occasion as it may think fit, if the Tribunal1considers it necessary [Section 408(10)], where—

(i) not less than 100 members of the company or of the members holding notless than 1/10th of the total voting power therein apply to the Company LawBoard in the matter [Section 408(1)]; and

(ii) on receipt of such application or on a reference made to it by the CentralGovernment make such inquiry as it deems fit to make [Section 408(1)]and found necessary to such appointment.

2. But instead of passing such an order, the Tribunal1 may direct the company toamend its articles to provide for a proportional representation (according toSection 265) for appointment of directors to protect minority interests.

3. In case the Tribunal1 passes on order for amendment of a company’s articlesand to make fresh appointment of directors in accordance with it, it may directthat until new directors are appointed in pursuance of the Government’s ordersuch number of persons of the company specified by the Tribunal1 shall holdoffice as additional directors, the Central Government shall appoint such additionaldirectors [Section 408(2)].

4. Any directors appointed by the Central Government shall not be liable to retirementby rotation.

1 In place of CLB vide Companies (Second Amendment) Act, 2002.


5. A person appointed under Sub-section (1) to hold office as a director or a persondirected under Sub-section (2) to hold office as an additional director, shall notbe required to hold any qualification shares nor his period of office shall be liableto determination by retirement of directors by rotation; but any such director oradditional director may be removed by the Central Government from his officeat any time and another person may be appointed by the Government in hisplace to hold office as director or as, the case may be, an additional director[Section 408(4)].

6. No change in the Board of directors made after a person is appointed or directedto hold office as a director or additional or under Section 408 shall, so long assuch director or additional director holds office, have effect unless confirmed bythe Tribunal1 [Section 408(5)].

7. Notwithstanding anything contained in this Act or in any other law, where anyperson is appointed by Central Government to hold office as director or additionaldirector of a company in pursuance of Sub-section (1) or Sub-section (2) ofSection 408, the Central Government may issue such directions to the companyas it may consider necessary or appropriate in regard to its affairs. Such directionsmay include directions to remove an auditor already appointed and to appointanother auditor in his place or to alter the articles of the company and upon suchdirections being given, the appointment, removal or alteration as the case maybe, shall be deemed to have come into effect as if the provisions of this Act inthis behalf have been complied with without requiring any further act or thing tobe done [Section 408(6)].

8. The Central Government may require the persons appointed as directors oradditional directors to report to the Government from time to time with regard tothe affairs of the company.

Answer 4(b)

Objects of Multi-State Co-operative Societies

A Multi-State Co-operative Society is registered under this Act to serve the interestof the members in more than one State with the object to promote the economic andsocial betterment of its members through mutual aid and in accordance with the Co-operative principles, such as —

(1) Membership is voluntary and open without any social, political or religiondiscrimination to all persons, utilising its services.

(2) All members, institutional or individual, enjoy equal right of voting i.e. one memberone vote.

(3) Surplus of savings, if any, arising from the operations of the society belongs tothe society as a whole and no individual member has a claim to the surplus.

(4) Surplus should be utilised for:

(a) Providing for development of the business of the society;

(b) Providing services for the common enjoyment of members;


(c) Distribution among the members in proportion to their transactions with thesociety.

(5) Actively co-operate with other Co-operative Societies at local, national orinternational levels.

(6) Undertake education of its members, office bearers and employees and thegeneral public regarding the principles and practice of co-operation.

(7) The share capital of Societies shall receive strictly limited rate of interest (i.e.to say dividend).

(8) Administration is based on democratically expressed will of the members.

(9) The management of the society is accountable to its own members.

The Multi-State Co-operative Societies may also be formed with the object offacilitating the operations of other such Societies or of Co-operative Societies or ofboth.

Question 5

(a) The managing director of a public limited company applied for purchasinga company’s flat. The price of the flat is ` 40 lakh. The managing directorsuggested that he may be allowed to pay ` 20 lakh and the balance of`20 lakh may be recovered from his salary in 40 installments. Accountsdepartment observed that it will tantamount to providing house buildingadvance to the managing director which is not covered by the rules of thecompany. Being the Company Secretary of the company, you have beenasked by the Board of directors to examine and submit a note stating therules in this regard and action to be taken for considering the request.

(8 marks)

(b) Can an insurance company commence business immediately after gettingregistered under the Companies Act, 1956 and obtaining certificate ofcommencement of business ? If not, what are the formalities required to befulfilled before commencing business ? (8 marks)

Answer 5(a)

Note on request of the Managing Director for purchase of a company flat

Mr. M, Managing Director has applied for purchasing a company flat. The price offlat is ` 40 lakh. The Managing Director has requested that he will pay ` 20 lakhas initial payment and the balance of ‘20 lakh may be recovered from his remuneration@ ̀ 50,000/- per month for 40 months.

The company has no scheme for payment of House building advance to its employees.The Bombay High Court in Fridie Ardeshir Mehta (Dr.) v. Union of India (1991) 70Comp. Cas. 210 (1991) 1 Comp. LJ 437 (Bom.) came to the conclusion that the companyselling one of its flats to one of its directors on receiving half the price in cash andagreeing to accept the balance in instalments does not amount to giving of loan to thedirector.


In view of the above, the view of the observation of Accounts Department is notcorrect that such purchasing of company’s flat by managing director would tantamountto providing house building advance to managing director.

As such Board may like to agree with the request of Managing Director.

Submitted.ABC

Company SecretaryAnswer 5(b)

Insurance Company (insurer) after getting registered under the Companies Act, 1956and obtaining certificate of commencement of business is also required to fulfill certainformalities as provided under the Insurance Act, 1938. These are as under:

— Insurer shall not be registered by a name identical with that by which a companyin existence is already registered, or so nearly resembling that name as to becalculated to deceive except when the insurer inexistence is in the course ofbeing dissolved and signifies his consent to the Authority.

— No insurer carrying on the business of life insurance, general insurance or re-insurance in India on or after the commencement of the Insurance Regulatoryand Development Authority Act, 1999, shall be registered unless it has, -

(i) a paid-up equity capital of rupees one hundred crores, incase of a personcarrying on the business of life insurance or general insurance; or

(ii) a paid-up equity capital of rupees two hundred crores, in case of a personcarrying on exclusively the business as are insurer.

Provided that in determining the paid-up equity capital specified under clause (i)or clause (ii), the deposit to be made and any preliminary expenses incurred inthe formation and registration of the company shall be excluded.

— The insurance company is required to obtain from the Insurance Regulatory andDevelopment Authority a certificate of registration for the particular class ofinsurance business.

Every application for registration shall be made in such manner as may be determinedby the regulations made by the Authority and shall be accompanied by -

(a) a certified copy of the memorandum and articles of association, where theapplicant is a company and incorporated under the Indian Companies Act, 1956;

(b) the name, address and the occupation, if any, of the directors where the insureris a company incorporated under the Indian Companies Act, 1956;

(c) a statement of the class or classes of insurance business done or to be done,and a statement that the amount required to be deposited under the provisionsbefore application for registration is made has been deposited together with acertificate from the Reserve Bank of India showing the amount deposited;

(d) in the case of an insurer having his principal place of business or domicile


outside India, a statement verified by an affidavit made by the principal officerof the insurer setting forth the requirements (if any) not applicable to nationals ofthe country in which such insurer is constituted, incorporated or domiciled whichare imposed by the laws or practice of that country upon Indian nationals as acondition of carrying on insurance business in that country;

(e) a certified copy of the published prospectus, if any, and of the standard policyforms of the insurer and statements of the assured rates, advantages, termsand conditions to be offered in connection with insurance policies together witha certificate in connection with life insurance business by an actuary that suchrates, advantages, terms and conditions are workable and sound;

Provided that in the case of marine accident and miscellaneous insurancebusiness other than workmen’s compensation and motorcar insurance the aboverequirements regarding prospectus, forms and statements shall be compliedwith only in so far as the prospectus, forms and statements may be available;

(f) the receipt showing payment of fee as may be determined by the regulationswhich shall not exceed fifty thousand rupees for each class of business as maybe specified by the regulations made by the Authority;

(g) such other documents as may be specified by the regulations made by theAuthority.

Question 6

(a) Well-done Ltd. wants to make a first call of ` 30 on equity share of nominalvalue of ` 100 each on 16th October, 2011. Can it do so ? Further, ifthe company proposes to make second call on 7th November, 2011, willit be permitted to do so ? (4 marks)

(b) The chairman and managing director of Progressive Ltd. resigned on 6thMay, 2009 as such, but the company filed Form No.32 with the Registrarof Companies stating the date of resignation as 15th March, 2010. Thecompany issued various cheques to its investors in repayment of theirdeposits after 6th May, 2009 which were bounced. The investors filed acomplaint against the former chairman and managing director. The articlesof association of the company provided that the resignation would beeffective from the date it was tendered. Will the chairman and managingdirector be liable in the instant case ? (4 marks)

(c) A registered office was shifted from one State to another. A labour litigationwas pending before the court. So, the employees objected to transfer.Whether the objection of the employees is sustainable ? (4 marks)

(d) Accounting year of Devdatta Ltd. ends on 30th June, 2009. It is requiredto hold an annual general meeting by 31st December, 2009. Due to somereason, the annual general meeting could not be held in December, 2009.On an application, the Registrar of Companies granted permission to holdthe meeting in February, 2010. The annual general meeting was duly heldin February, 2010.

Has the company complied with the requirements of holding annual general


meeting every year ? Will it amount to contravention of the provisionsof section 166 ? (4 marks)

Answer 6(a)

Proviso to Regulation 13(1) to the Table ‘A’ of the Companies Act provides that nocall shall exceed 25% of the nominal value of the share or be payable at less than onemonth from the date fixed for the payment of the last proceeding call.

In the given case, the proposed first call is exceeding the limit of 25% of nominalvalue of share. Therefore, the company will not be permitted to do so. Further, thesecond call is proposed to be payable at less than one month from the first call. So, itis also not permitted.

Answer 6(b)

The chairman and managing director of Progressive Limited could not be heldresponsible under s.141 of the Negotiable Instruments Act 1881 as he had resignedfrom his directorship on 6th May 2009 and the cheques issued after 6th may 2009 whichwere bounced.

In Dushyant D. Anjaria v. Wall Street Finance Ltd. (2001) Comp. Cas. 655 (Bom.),the Bombay High Court had held that the resignation of a Director would be effectivefrom the date it was submitted because the letter brings out clearly his intentions toresign. However, if there was delay on the part of the company in intimating the ROCabout the date of the resignation, the resigning Director could not be seddled withresponsibility and liability for such delay.

Date of filing of Form 32 is not conclusive as to date of resignation of director - dateshown in the letter of resignation is to be used. Pandurang Camotim Sancoalcar v.Suresh Prabhakar Prabhu 48 SCL 437, 53 CLA 265.

Articles of association of the company also provided that the resignation would beeffective from the date it was tendered.

In Glossop v. Glossop (1907) Ch. D. 370, it was held that the resignation of adirector would become effective on and from the date it was tendered and from theArticles of Association of the Company, it would be clear that resignation of a Directorwould be effective from the date it was tendered.

Answer 6(c)

In Bharat Commerce and Industries Ltd. In re, (1973) 43 Com Cas 162, it was heldthat employees’ union which is a registered body and which represents quite a numberof the employees employed at the registered office of the company, has the right toappear and to oppose this application on the ground that their interests would be likely tobe prejudicially affected if such special resolution would be confirmed by this court. It isalways open to the employees concerned to bring it to the notice of the court throughtheir union or even individually, if the company in passing such resolution did not actbona fide so as to enable the court to examine the reasons set out in the petition toconsider whether it would be just and equitable to confirm such a resolution.

Therefore, the objection of the employees is sustainable.


Answer 6(d)

In the given case, accounting year of the company ends on 30th June, 2009. As persection 166, it is required to hold the Annual General Meeting latest by the 31st December,2009. if for any reason, the Annual General Meeting cannot be held in December, 2009,and if on an application, the Registrar grants time to hold the meeting in February, 2010,the company by holding the Annual General Meeting in February, 2010, is not complyingwith the requirements of holding an Annual General Meeting every year. Still, it will notbe said to have contravened the provisions of section 166.

Vide, Letter No. 34/11/69-CL-III, dated 13-1-1972, the question whether the secondproviso to sub-section (1) of section 166 empowers the Registrar of Companies to grantextension not exceeding three months, though the company concerned may not be ableto hold its annual general meeting in a particular calendar year, has been considered bythe Company Law Board.

The Board (now the Central Government) is of the view that the power of the Registrarconferred by the second proviso of the aforesaid section of the Act enabling him to grantextension of time to hold the annual general meeting is exercisable by the Registrar ofCompanies without restriction or qualification up to a limit of three months. He can,therefore, grant extension of time for special reasons up to the maximum limit of threemonths, even if such extension allows the company to hold its general meeting beyondthe calendar year.

Question 7

State, with reasons in brief, whether the following statements are true or false:

(i) An incorporated company never dies except when it is wound-up as perlaw.

(ii) An auditor of a government company is appointed by the CentralGovernment on the advice of Comptroller and Auditor General of India.

(iii) A company has a statutory right to alter its articles of association.

(iv) A public company can be converted into a private company without theapproval of the Central Government.

(v) A company may create a mortgage or a charge, including a floatingcharge, on any of its book-debts.

(vi) The power to make calls is exercised by the shareholders in theirmeetings by means of a resolution.

(vii) Shares of a company can be a subject matter of a valid pledge.

(viii) The Companies Act, 1956 lays down certain qualifications for a person tobe appointed as a director of a company.

(2 marks each)

Answer 7(a)

(i) True. As stated in Section 34(2) of the Companies Act, an incorporated companyhas perpetual succession. The company shall continue to exist indefinitely till it


is wound-up in accordance with the provisions of the Companies Act. “Membersmay come and members may go but the company can go on forever”.

(ii) False. Section 619(2) of the Companies Act, 1956 provides that the auditor ofa Government company shall be appointed or re-appointed by the Comptrollerand Auditor-General of India.

(iii) True. A company has a statutory right to alter its articles of association. But thepower to alter is subject to the provisions of the Act and to the conditionscontained in the memorandum. Section 31 provides that subject to the provisionsof the Act and the conditions contained in its memorandum, a company may,by special resolution, alter its articles, and adds that any alteration so madeshall be as valid as if originally contained in the articles.

(iv) False. An alteration of articles to effect a conversion of a public company intoa private company cannot be made without the approval of the CentralGovernment [Section 31].

(v) True. In accordance with provisions of section 125(4)(d), a company may createa mortgage or a charge including a floating charge, on any of its book-debts.

(vi) False. The power to make calls is exercised by the Board in its meeting bymeans of a resolution and in accordance with the articles of the company.

(vii) True. Shares of a company can be a subject matter of a valid pledge.Section 2(7) of Indian Contract Act defines the term ‘goods’ as meaning everykind of moveable property other than actionable claim and money and includesstocks and shares. Shares are goods under the Indian Contract Act and can bea subject matter of pledge.

(viii) False. The Companies Act, 1956 does not lay down any qualifications for aperson to be appointed as a director of a company. However, it mentionsdisqualifications of directors, which are contained in Section 274 of the Act.

Question 8

(a) “The objective of introduction of secretarial standards by the ICSI is tointegrate, harmonise and standardise the diverse practices for goodgovernance.” Explain. (6 marks)

(b) Who may petition for winding-up of a company ? What are the proceduresfor winding-up of unregistered company ? (6 marks)

(c) Discuss the term ‘profit and loss account’ of a company. What are thematters to be disclosed in the profit and loss account ? (4 marks)

Answer 8(a)

The ultimate goal of Secretarial Standards Board issued by the ICSI is to promotegood corporate practice leading to better corporate governance. The Standards are forgood practices and desirable corporate governance with a view to ensuring full play ofshareholders democracy and utmost transparency, integrity and fair play, going beyondthe minimum requirements of law. The adoption of Secretarial Standards will have a


substantial impact on the improvement of quality of secretarial practices being followedby companies.

Companies follow diverse secretarial practices and, therefore, there is a need tointegrate, harmonise and standardize such practices so as to promote uniformity andconsistency

By following the Secretarial Standards in letter and spirit companies will be able toensure adoption of uniform, consistent and best secretarial practices with corporatesector. Such uniformity of best practices, consistently applied will result in furtheringthe shareholders’ democracy by laying down principles for better corporate disclosuresthus adding value to the general endeavour to strive for good governance.

Ten Secretarial Standards issued so far are secretarial standard on Meetings of theBoard of Directors (SS-1), General Meetings (SS-2), Dividend (SS-3), Registers andRecords (SS-4), Minutes (SS-5), Transmission of Shares and Debentures (SS-6),PassingResolutions by Circulation (SS-7), Affixing of Common Seal (SS-8), Forfeiture of Shares(SS-9), Board’s Report (SS-10)

Answer 8(b)

(1) An application for the winding up of a company has to be made by way ofpetition to the Court. A petition may be presented under Section 439 by any ofthe following persons:

(a) the company; or

(b) any creditor or creditors, including any contingent or prospective creditor orcreditors; or

(c) any contributory or contributories; or

(d) all or any of the parties specified above in clauses (a), (b), (c) whethertogether or separately; or

(e) the Registrar; or

(f) any person authorised by the Central Government in the case falling underSection 243, i.e., following upon a report of inspectors;

(g) by the Central government or state Govt., in a case falling under clause (h)of Section 433;*

(2) Section 582 of the Act specifies “unregistered companies”, which may be woundup by the order of the Court under the provisions of Part X of the Act. Nounregistered company shall be wound-up under this Act voluntarily by the Tribunal.

(3) The circumstances in which an unregistered company may be wound-up are asfollows:—

(a) if the company is dissolved, or has ceased to carry on business, or iscarrying on business only for the purpose of winding up its affairs;

(b) if the company is unable to pay its debts;

(c) if the Tribunal is of opinion that it is just and equitable that the companyshould be wound-up.


(4) An unregistered company shall, for the purposes of this Act, be deemed to beunable to pay its debts—

(a) if a creditor, by assignment or otherwise, to whom the company is indebtedin a sum exceeding five hundred rupees then due, has served on the company,by leaving at its principal place of business, or by delivering to the secretary,or some director, manager or principal officer of the company, or by otherwiseserving in such manner as the Tribunal may approve or direct, a demandunder his hand requiring the company to pay the sum so due, and thecompany has, for three weeks after the service of the demand, neglected topay the sum or to secure or compound for it to the satisfaction of the creditor;

(b) if any suit or other legal proceeding has been instituted against any memberfor any debt or demand due, or claimed to be due, from the company, orfrom him in his character of member, and notice in writing of the institutionof the suit or other legal proceeding having been served on the company byleaving the same at its principal place of business or by delivering it to thesecretary, or some director, manager or principal officer of the company orby otherwise serving the same in such manner as the Tribunal may approveor direct, the company has not, within ten days after service of the notice,—

(i) paid, secured or compounded for the debt or demand; or

(ii) procured the suit or other legal proceeding to be stayed; or

(iii) indemnified the defendant to his satisfaction against the suit or otherlegal proceeding, and against all costs, damages and expenses to beincurred by him by reason of the same;

(c) if execution or other process issued on a decree or order of any Court orTribunal in favour of a creditor against the company, or any member thereofas such, or any person authorised to be sued as nominal defendant onbehalf of the company, is returned unsatisfied in whole or in part;

(d) if it is otherwise proved to the satisfaction of the Tribunal that the companyis unable to pay its debts.

Answer 8(c)

Every profit and loss account of a company shall give a true and fair view of theprofit or loss of the company for the financial year and shall, subject as aforesaid,comply with the requirements of Part II of Schedule VI, so far as they are applicablethereto.

As per section 216 of the Companies Act, 1956, the profit and loss account shall beannexed to the balance sheet.

The profit and loss account –

(a) shall be made out as clearly to disclose the result of the working of the companyduring the period covered by the account; and

(b) shall disclose every material feature, including credits or receipts and debits orexpenses in respect of non-recurring transactions or transactions of anexceptional nature.


The profit and loss account shall disclose the following information in respect of theperiod covered by the account:

(i) (a) The turnover, that is, the aggregate amount for which sales are effected bythe company, giving the amount of sales in respect of each class of goodsdealt with by the company, and indicating the quantities of such sales foreach class separately.

(b) Commission paid to sole selling agents within the meaning of section 294of the Act.

(c) Commission paid to other selling agents.

(d) Brokerage and discount on sales, other than the usual trade discount.

(ii) The amount provided for depreciation, renewals or diminution in value of fixedassets.

(iii) The amount of interest on the company’s debentures and other fixed loans.

(iv) The amount of charge for Indian income-tax and other Indian taxation on profits,including, where practicable, with Indian income-tax any taxation imposedelsewhere to the extent of the relief, if any, from Indian income-tax anddistinguishing, where practicable, between income-tax and other taxation.

(v) The amounts reserved for -

(a) repayment of share capital; and

(b) repayment of loans.

(vi) (a) The aggregate, if material, of any amounts set aside or proposed to be setaside, to reserves, but not including provisions made to meet any specificliability, contingency or commitment known to exist at the date as at whichthe balance sheet is made up.

(b) The aggregate, if material, of any amounts withdrawn from such reserves.

(vii) (a) The aggregate, if material, of the amounts set aside to provisions made formeeting specific liabilities, contingencies or commitments.

(b) The aggregate, if material, of the amounts withdrawn from such provisions,as on longer required.

(viii) (a) The amount of income from investments, distinguishing between tradeinvestments and other investments.

(b) Other income by way of interest, specifying the nature of the income.

(c) The amount of income-tax deducted if the gross income is stated undersub-paragraphs (a) and (b) above.

(ix) Amount, if material, by which any items shown in the profit and loss account areaffected by any change in the basis of accounting.

EP–ELL– December 2011 20

ECONOMIC AND LABOUR LAWS


PART A(Answer Question No.1 which is compulsory

and any three of the rest from this part.)Question 1

20

With reference to the relevant legal enactments, write short notes on any fiveof the following :

(i) Bid rigging

(ii) Principal display panel

(iii) Collective trade mark

(iv) Relevant geographic market

(v) Legal metrology

(vi) Potential infringement of a patent

(vii) Principles of sustainable living. (3 marks each)

Answer 1(i)

Bid rigging

The explanation appended to the Section 3 of the Competition Act, 2002 defines theterm bid rigging to mean any agreement between enterprises or persons engaged inidentical or similar production or trading of goods or provision of services, which has theeffect of eliminating or reducing competition for bids or adversely affecting or manipulatingthe process for bidding.

Bid rigging takes place when bidders collude and keep the bid amount at a pre-determined level. Such pre-determination is by way of intentional manipulation by themembers of the bidding group. Bidders could be actual or potential ones, but they colludeand act in concert.

Answer 1(ii)

Principal display panel

Principal display panel in relation to a package has been defined under Rule 2(h) ofthe Legal Metrology (Packaged Commodities) Rules, 2011 to mean the total surface areaof the package where the information is required to be given. For this purpose, all theinformation could be grouped together and given at one place or the pre-printed informationcould be grouped together and given in one place and on line information grouped togetherin other place.

Rule 7 specifies the area, size, letter, etc. of the principal display panel in differentcases. This rule specifies that in the case of a package having a capacity of five cubiccentimeters or less, the principal display panel may be card or tape affixed firmly to thepackage or container or bearing the required information.

21 EP–ELL– December 2011

The height of any numeral in the declaration on the principal display package shouldnot be less than that specified in Table I to this rule. The height of letters in the declarationshould not be less than 1mm height. When blown, formed, moulded, embossed or perforatedthe height of letters should not be less than 2mm. However, the width of the letter ornumeral should not be less than one third of its heights, except in the cases of numerals/letters specified under the rules.

Answer 1(iii)

Collective trade mark

As per Section 2(1) (g) of Trade Marks Act, 1999, Collective Marks means a trademark distinguishing the goods or services of members of an association of persons notbeing a partnership within the meaning of the Indian Partnership Act, 1932 which is theproprietor of the mark from those of others.

Sections 61 to 68 contain provisions relating to the registration of Collective trademarks. These sections provide for registration of a collective mark which belongs to agroup or association of persons and the use thereof is reserved for members of the groupor association of persons. Collective marks serve to distinguish characteristic featuresof the products or services offered by those enterprises. It may be owned by an associationwhich may not use the collective mark but whose members may use the same. Theassociation ensures compliance of certain quality standards by its members, who mayuse the collective mark if they comply with the prescribed requirements concerning itsuse. The primary function of a collective mark is to indicate a trade connection with theAssociation or Organisation.

Answer 1(iv)

Relevant Geographic Market

As per Section 2(s) of the Competition Act, 2002 ‘Relevant Geographic Market’ meansa market comprising the area in which the conditions of competition for supply of goodsor provision of services or demand of goods or services are distinctly homogenous andcan be distinguished from conditions prevailing in neighbouring areas.

For determining the “relevant geographic market”, the Competition Commission ofIndia shall have due regard to all or any of the following factors, namely;⎯

(a) regulatory trade barriers;

(b) local specification requirements;

(c) national procurement policies;

(d) adequate distribution facilities;

(e) transport costs;

(f) language;

(g) consumer preferences;

(h) need for secure, regular supplies or rapid after-sales service.


Answer 1(v)

Legal Metrology

Legal Metrology is the name by which the law relating to weights and measures isknown in international parlance. Legal Metrology is very vital for scientific, technologicaland industrial progress of any country. The establishment of national standards of weightsand measures and their proper enforcement aim at ensuring accuracy of measurementsand measuring instruments and thus legal metrology strengthens the national economyin a broader sense besides being a potential instrument of consumer protection. Thescope of legal metrology according to international practice extends to three broad fieldsof human activities, namely, commercial transactions, industrial measurements andmeasurements needed to ensure public health and human safety.

As per section 2(g) of Legal Metrology Act, 2009 “Legal Metrology” means that partof metrology which treats units of weighment and measurement, methods of weighmentand measurement and weighing and measuring instruments, in relation to the mandatorytechnical and legal requirements which have the object of ensuring public guarantee fromthe point of view of security and accuracy of the weighments and measurements.

Answer 1(vi)

Potential infringement of patent

Patent infringement is the commission of a prohibited act with respect to a patentedinvention without permission from the patent holder. Permission may usually be grantedin the form of a license. The patent infringement may vary by jurisdiction, but it normallyincludes using or selling the patented invention. In several countries, a use is needed tobe commercial to constitute patent infringement.

Action of Infringement

Whenever the rights of the patentee are violated, his rights are secured again by theAct through judicial intervention. The patentee has to institute a suit for infringement. Therelief’s which may be awarded in such a suit are:

1. Interlocutory/ interim injunction.

2. Damages or account of profits.

3. Permanent injunction.

As regards potential infringement, Section 19(1) of the Patents Act, 1970 providesthat if in consequence of the investigations it appears to the Controller that an inventionin respect of which an application for a patent has been made cannot be performedwithout substantial risk of infringement of a claim of any other patent, he may direct thata reference to that other patent, be inserted in the applicant’s complete specification byway of notice to the public within such time as may be prescribed, unless

(a) the applicant shows to the satisfaction of the Controller that there are reasonablegrounds for contesting the validity of the said claim of the other patent; or

(b) the complete specification is amended to the satisfaction of the Controller.


Answer 1(vii)

Principles of Sustainable Living

The principles of sustainable living, focus on respect and care for the community oflife, improving the quality of human life, conserving the earths vitality and diversity,minimizing the depletion of non-renewable resources, keeping within the earths carryingcapacity, changing personal attitudes and practices, enabling communities to care fortheir own environments, providing a natural framework for integrating development andconservation. In addition to the above, more familiar sectors of environment and policywhich requires attention are, energy, business, human settlements, fresh water, oceansand costal areas etc.

An ethic based on respect and care for each other and for Earth is the foundation ofsustainable living. Development ought not to be at the expense of other groups or latergenerations. Development should not threaten the survival of other species. The benefitsand costs of resource use and environmental conservation should be shared fairly amongdifferent communities, among people who are poor and those who are rich and betweenthe present and the future generation.

Question 2

State, with reasons in brief, whether the following statements are true or false. Attemptany five :

(i) Registration of an undertaking belonging to the First Schedule of theIndustries (Development and Regulation) Act, 1951 is not necessary incertain cases.

(ii) The provisions of the Competition Act, 2002 are not applicable to agovernment company.

(iii) Money laundering can provide short-term benefits to the economy.

(iv) Special Economic Zones are growth engines.

(v) The limitation period for filing a complaint under the Consumer ProtectionAct, 1986 is two years from the date on which the cause of action ariseswithout any exception.

(vi) There is no difference between the preparation for committing an offenceand an attempt to commit an offence under the Essential CommoditiesAct, 1955. (3 marks each)

Answer 2(i)

True

Registration of an undertaking will not be necessary if the undertaking (i) is asmall scale industrial undertaking or (ii) is otherwise exempt from the licensing/registration provisions of the Industries (Development and Regulation) Act, 1951 or (iii)where the undertaking concerned is not satisfying the definition of the term ‘factory’under the Act.


Answer 2(ii)

False

The provisions of the Competition Act, 2002 are applicable to Government Companyas it falls within the ambit of definition ‘Enterprise’ defined under section 2(h) of theCompetition Act, 2002, which is as under:

‘Enterprise’ means a person or a department of the Government, who or which is,engaged in any activity, relating to production, control of goods or articles or provision ofservices, of any kind, or in investment, or in the business of acquiring, holding, underwritingor dealing with shares, debentures or other securities whether such unit or division orsubsidiary is located at the same place where the enterprise is located or at differentplace(s).

However, it does not include any activity of the Central Government relating tosovereign functions of Government including all activities carried on by the GovernmentDepartments dealing with atomic energy, currency, defence and space.

Thus, Sovereign functions of Government are excluded from definition of enterprisebut Government Departments performing non-sovereign functions for consideration aresubject to compliance with the Competition Act, 2002.

Answer 2(iii)

False

Money laundering is the processing of criminal proceeds to disguise its illegal origin.Economies with growing or developing financial centers, but inadequate controls areparticularly vulnerable to money laundering, as against the established financial centercountries, which implement comprehensive anti-money laundering regimes. The gaps ina national anti-money laundering system are exploited by launderers, who tend to movetheir networks to countries and financial systems with weak or ineffective countermeasures. As with the damaged integrity of an individual financial institution, there is adamping effect on foreign direct investment when a country’s commercial and financialsectors are perceived to be subject to the control and influence of organised crime.

In times of decelerating growth, an infusion of hard currency can bolster a country’sforeign reserves, ease the hardship associated with budget tightening policies andmoderate foreign indebtedness. While these are short-term benefits associated with aninflow of criminal monies, the long-term effects are negative. One difference betweenofficial borrowing and laundered funds is that the former can be controlled by Government,whereas the funds owned by criminals escape the Governments ability to control andregulate the economy.

Answer 2(iv)

True

Special Economic Zones (SEZ) are growth engines that can boost manufacturing,augment exports of goods and services, generate employment opportunity, promotion ofinvestment from domestic and foreign source, development of infrastructure facilitiesand it generate additional economic activity.


Answer 2(v)

False

Section 24A of the Consumer Protections Act, 1986 provides that the District Forum,the State Commission, or the National Commission shall not admit a complaint unless itis filed within two years from the date on which the cause of action has arisen.

However, where the complainant satisfies the Forum/Commission as the case maybe, that he had sufficient cause for not filing the complaint within two years, such complaintmay be entertained by it after recording the reasons for condoning the delay.

Answer 2(vi)

False

Section 8 of the Essential Commodities Act, 1955 provides that any person whoattempts to contravene or abets a contravention of any order made under Section 3 shallbe deemed to have contravened that order.

However, an attempt to commit an offence is to be distinguished from a preparationto commit the offence. The former is punishable, but the latter is not.

In Malkiat Singh and another v. State of Punjab (AIR 1970 SC 710), the question tobe considered was whether upon the facts found by the lower Courts any offence hadbeen committed by the appellants. Under the Punjab Paddy (Export) Order, 1939 exportof paddy from the State of Punjab was prohibited. The word ‘export’ was defined to meanto take’ or cause to be taken out of any place within the State of Punjab, to any placeoutside the State. On suspicion, the truck driven by Malkiat Singh, and carrying thepaddy in question, was stopped at a place which was 32 miles away from the Punjabborder, well within the State of Punjab. It was, therefore, evident that there was no exportof paddy within the meaning of the Order. It was, however, argued on behalf of therespondents that there was an attempt on the part of the appellant to commit the offence.Rejecting this contention, it was held that on the facts of the case there was no attempton the part of the appellants to commit the offence of export. It was merely a preparationon the part of the appellant, and as a matter of law, a preparation for committing anoffence is different from an attempt to commit it.

Question 3

(a) Distinguish between any two of the following :

(i) ‘Wholesale package’ and ‘retail package’.

(ii) ‘Carry on business licence’ and ‘industrial licence’.

(iii) ‘Invention’ and ‘patentable invention’.

(iv) ‘Appellate tribunal’ and ‘court’. (5 marks each)


(i) An appeal against the order passed by the Consumer Disputes


Redressal Forum has to be preferred within days fromthe date of the order to the State Commission.

(ii) Prior approval of RBI is required for the release of foreign exchangefor meeting the expenses of medical treatment exceedingUS$ or its equivalent.

(iii) Any person aggrieved by an order of confiscation of an essentialcommodity may prefer an appeal to the within onemonth from the date of passing of the order.

(iv) Foreign direct investment (FDI) in trusts other than isnot permitted.

(v) Prior approval of RBI is required for availing of foreign exchangefacility exceeding for persons going to USA foremployment. (1 mark each)

Answer 3(a)(i)

Distinction between Wholesale Package and Retail Package

Wholesale package means a package containing—

(a) a number of retail packages, where such first mentioned package is intended forsale, distribution or delivery to an intermediary and is not intended for sale directto single consumer; or

(b) a commodity sold to an intermediary in bulk to enable such intermediary to sell,distribute or deliver such commodity to the consumer in smaller quantities; or

(c) packages containing or more than ten retail packages provided that the retailpackages are labeled as required under the rules.

Retail package means the packages which are included for retail sale to the ultimateconsumer for the purpose of consumption as the commodity contained therein and includesthe imported packages. The ultimate consumer however does not include industrial orinstitutional consumer.

Institutional consumer means the institutional consumer like transportation, Airways,Railways, Hotels, Hospitals or any other service institutions who buy packagedcommodities directly from the manufacturer for use by that institution and IndustrialConsumer means the industrial consumer who buy packaged commodities directly fromthe manufacturer for use by that industry.

Answer 3(a)(ii)

Distinction between Carry on Business licence and Industrial licence

A Carry on Business licence is required when a small scale unit exceeds the prescribedsmall scale limit of investment in plant and machinery by way of natural growth andcontinues to manufacture small scale reserved items(s). Also, if exemption from Industriallicensing granted for any item is withdrawn, the industrial undertakings manufacturingsuch item(s) require Carry on Business licence.The application for Carry on Business


licence should be submitted in prescribed form to the SIA, Department of industrial Policyand Promotion, Ministry of Commerce and Industries.

An Industrial licence is a written permission from the Government to an industrialundertaking to manufacture specified articles, listed in the First Schedule to the Industries(Development and Regulation) Act, 1951 and includes particulars of industrial undertaking,its location, articles to be manufactured, the capacity on the basis of maximum utilisationof plant and machinery etc. The licence is subject to a validity period within which thelicensed capacity of the undertaking should be established.

Answer 3(a)(iii)

Distinction between Invention and Patentable Invention

Section 2(j) of the Patents Act, 1970 defines invention as to mean a new product orprocess involving an inventive step and capable of Industrial application. The term‘inventive step’ as to mean a feature of an invention that involves technical advance ascompared to the existing knowledge or having economic significance or both that makesthe invention not obvious to a person skilled in the art.

The essential requirements of a patentable invention are novelty, inventive step,utility and commercial viability. Apart from the minimum requirements for being patentable,there are some more limitations on inventions with respect to their patentability. As perthe Patents Act, 1970, the subject matter of patent must be a process or a product.However, certain inventions are considered to be not patentable and are not consideredto be inventions. There are also some other inventions which are excluded frompatentability. Some are considered to be not inventions, mainly for the sake of protectingpublic interest.

Answer 3(a)(iv)

Distinction between Appellate Tribunal and Court

Appellate Tribunal is constituted under a special enactment. Special matter andquestions are entrusted to the Appellate Tribunal for their decision.The procedures to befollowed in the case of Appellate Tribunal are enshrined in the enactment itself whereasthe Court will follow the procedures prescribed under the Civil Procedure Code.

Composition of Appellate Tribunal consists of both judicial and technical member,but in case of Court, members are judicial. Any person aggrieved by the order of AppellateTribunal may appeal to High Court/Supreme Court as the case may be as specified underthat special enactment Act.

Both the Courts and the Appellate Tribunals are constituted by the State and arevested with judicial as distinguished from purely administrative or executive functions.They are both adjudicating bodies and they deal with and finally determine disputesbetween parties which are entrusted to the jurisdiction.

The basis and the fundamental feature which is common to both the Courts and theAppellate Tribunals is that they discharge judicial functions and exercise judicial powerswhich inherently vest in a sovereign state. Thus, there is no much difference logicallybetween the Court and the Tribunal and both are meant to resolve the disputes.


Answer 3(b)

(i) An appeal against the order passed by the Consumer Disputes RedressalForum has to be preferred within 30 days from the date of the order tothe State Commission.

(ii) Prior approval of RBI is required for the release of foreign exchange formeeting the expenses of medical treatment exceeding US$ 1,00,000 or itsequivalent.

(iii) Any person aggrieved by an order of confiscation of an essential commoditymay prefer an appeal to the State Government within one month from thedate of passing of the order.

(iv) Foreign direct investment (FDI) in trusts other than Venture Capital Fundis not permitted.

(v) Prior approval of RBI is required for availing of foreign exchange facilityexceeding US $ 1,00,000 for persons going to USA for employment.

Question 4

(a) With reference to the relevant provisions of the Foreign ExchangeManagement Act, 1999 and the rules and regulations made thereunder,advise on the following :

(i) Ram, a person resident in India, intends to invest `25,000 in foreignsecurities in a calendar year.

(ii) Infotech Ltd., an Indian company owning a micro/small enterprise,intends to issue shares against foreign direct investment.

(iii) Shyam, an Indian resident, wishes to acquire qualification shares forbecoming a director of a company outside India and the considerationis US $30,000.

(iv) Naresh, an Indian citizen, enters into an agreement for the lease ofmachinery to a foreign party and intends to ship the machinery abroad.

(v) Mohan, an Indian citizen resident outside India, intends to acquireimmovable property in India. (1 mark each)

(b) Ram Dhenu Ltd. and Diamond Engineers entered into a contract for the supplyof electrical equipments. The contract contained an arbitration clause torefer the disputes to an arbitral tribunal. Ram Dhenu Ltd. made a complaintto the Consumer Disputes Redressal Forum for ‘deficiency in service’. Theopposite party opposed the complaint in view of the arbitration clausecontained in the contract. Will it succeed ? Give reasons. (5 marks)

(c) Mention the obligations of banking companies, financial institutions andintermediaries under the Prevention of Money Laundering Act, 2002.

(5 marks)


Answer 4(a)(i)

Investment in foreign Securities is a Capital Account Transaction specified in ScheduleI of Foreign Exchange Management (Permissible Capital Account Transaction)Regulations, 2000.

Regulation 4 of Foreign Exchange Management (Permissible Capital AccountTransaction) Regulations, 2000 provides that subject to the provisions of the ForeignExchange Management Act, 1999 or the Rules or Regulations or directions or ordersmade or issued thereunder, a resident individual may, draw from an authorized person offoreign exchange not exceeding US$ 2,00,000 per financial year with effect fromSeptember 26, 2007, for capital account transaction specified in Schedule I.

In the light of the above legal provisions, Ram, can invest Rs. 25, 000 in foreignsecurities in a calendar year.

Answer 4(a)(ii)

Indian companies including those which are micro and small enterprises can issuecapital against foreign direct investment subject to compliance with Foreign DirectInvestment Policy issued by the Government from time to time and Foreign ExchangeManagement (Transfer or Issue of Security by a Person Resident outside India)Regulations, 2000.

In the light of the above legal provisions, Infotech Ltd. can issue shares againstforeign direct investment.

Answer 4(a)(iii)

As per Regulation 24 of Foreign Exchange Management (Transfer or Issue of anyForeign Security) Regulations, 2000 a person resident in India being an individual mayacquire foreign securities as qualification shares for becoming a director of a companyoutside India provided the number of shares so acquired shall be the minimum required tobe held for holding the post of director and in any case shall not exceed 1% of the paid upcapital of the company and the consideration for acquisition of such share does notexceed the ceiling as stipulated by Reserve Bank of India from time to time. CurrentlyReserve Bank of India stipulates that the said limit shall not exceed US$ 20, 000.Otherwise prior approval of Reserve Bank of India is required.

In the light of the above legal provisions Shyam, can acquire qualification share forUS $ 30.000 with prior approval of Reserve Bank of India.

Answer 4(a)(iv)

Regulation 14 of the Foreign Exchange Management (Export of Goods and Services)Regulation, 2000 provides that no person is allowed, except with the prior permission ofthe Reserve Bank, to take or send out by land, sea or air any goods from India to anyplace outside India on lease or hire or under any arrangement or in any other mannerother than sale or disposal of such goods.

In the light of the above legal provision, Naresh, can enter into agreement for thelease of machinery to a foreign party and ship the machinery abroad with prior approval ofReserve Bank of India.


Answer 4(a)(v)

As per Regulation 3 of the Foreign Exchange Management (Acquisition and Transferof Immovable Property in India) Regulations, 2000, an Indian citizen resident outsideIndia may acquire any immovable property in India other than agricultural or plantationproperty or farm house.

In the light of aforesaid legal provision, Mohan can acquire any immovable propertyin India other than agricultural or plantation property or farm house.

Answer 4(b)

The opposite party will not succeed.

The facts of the present case are similar to the case of N.K. Modi v. Fair AirEngineers Pvt. Ltd. In this case, the National Commission observed that the forumsunder the Consumer Protection Act are not to be construed as judicial authorities and theproceedings before them cannot be taken to be legal proceedings. For a judicial authority,it is necessary that some part of the judicial power should be transferred to and vested inthe forums as in the case of civil/criminal/special courts. Though, the consumer forumshave powers to adjudicate dispute, they do not have any trappings of a Court. Except,conforming to the principle of natural justice, consumer forums are not governed by theEvidence Act or the Civil Procedure Code, except for certain limited purposes. Even theLimitation Act is not strictly applicable to the proceedings before them. Observing this,the National Commission came to the conclusion that consumer forums can entertain acomplaint arising out of the contract which provides for arbitration of disputes, andSection 34 of the Arbitration Act shall not be a bar on the jurisdiction of the forums.

Answer 4(c)

Prevention of Money Laundering Act, 2002 provides that every banking company,financial institution and intermediary to maintain a record of all transactions, the natureand value of which may be prescribed, whether such transactions comprise of a singletransaction or a series of transactions legally connected to each other, and when suchseries of transactions take place within a month. These informations are required to befurnished to the Director within such time as may be prescribed. Banks and financialinstitutions are required to verify and maintain the records of the identity of all its clients,in such manner as may be prescribed. The records as mentioned above are required tobe maintained for a period of ten years from the date of cessation of the transactionsbetween the clients and the banking company, financial institution or intermediary.

Question 5

(a) Describe the powers of the National Green Tribunal constituted under theNational Green Tribunal Act, 2010. (5 marks)

(b) An enterprise which is engaged in hazardous or inherently dangerous activityand an industry which poses a potential threat to the health and safety ofthe persons and of those residing in the surrounding areas owes an absoluteand non-delegatable duty to the community. Comment. (5 marks)

(c) Briefly mention the provisions of the Noise Pollution (Regulation and Control)Rules, 2000 relating to control of noise pollution. (5 marks)


Answer 5(a)

Section 19 National Green Tribunal Act, 2010 prescribes that, the Tribunal shall notbe bound by the procedure laid down in the Code of Civil Procedure, 1908 but shall beguided by the principles of natural justice. The Tribunal has been empowered to regulateits own procedure and also not bound by the rules of evidence contained in the IndianEvidence Act, 1872.

National Green Tribunal, for the purpose of discharging its functions, has been entrustedwith the same powers as are vested in a Civil Court under the Code of Civil Procedure,1908, while trying a suit, in respect of the following matters namely:

(a) summoning and enforcing the attendance of any person and examining him onoath;

(b) requiring the discovery and production of documents;

(c) receiving evidence on affidavits;

(d) subject to the provisions of section 123 and 124 of the Indian Evidence Act,1872, requisitioning any public record or document or copy of such record ordocument from any office;

(e) issuing summons for the examination of witnesses or documents;

(f) reviewing its decisions;

(g) dismissing a representation for default or deciding it ex parte;

(h) setting aside any order or dismissal of any representation for default or any orderpassed by it ex parte; and

(i) pass an interim order (including granting an injunction or stay) after providing theparties concerned an opportunity to be heard, on any application made or appealfiled under this Act;

(j) pass an order requiring any person to cease and desist from committing or causingany violation of any enactment specified in Schedule I;

(k) any other matter which is required to be, or may be prescribed by the CentralGovernment.

Section 19 (5) provides that all proceedings before the Tribunal shall be deemed tobe the judicial proceedings within the meaning of sections 193, 219 and 228 for thepurposes of section 196 of the Indian Penal Code and the Tribunal shall be deemed to bea civil court for the purposes of section 195 and Chapter XXVI of the Code of CriminalProcedure, 1973.

Section 15 of the National Green Tribunal Act, 2010 also empowers National GreenTribunal, by an order, to provide,—

(a) relief and compensation to the victims of pollution and other environmental damagearising under the enactments specified in the Schedule I (including accidentoccurring while handling any hazardous substance);

(b) for restitution of property damaged;

(c) for restitution of the environment for such area or areas, as the Tribunal maythink fit.


Answer 5(b)

The statement is true.

Supreme Court in M.C. Mehta and Another v. Union of India and others [(1987) 1Comp. LJ 99 (SC)] ruled that an application for compensation in a pollution case can bemaintained under Article 32 of the Constitution, for, such application is for the protectionof the fundamental rights of the people and the Court has all incidental and ancillarypowers including the power to forge new remedies and fashion new strategies designedto enforce fundamental rights. On the question of liability of an enterprise engaged inhazardous activities, the Supreme Court laid down for the first time a far-reaching ruling,that an enterprise which is engaged in hazardous or inherently dangerous activity and anindustry which poses a potential threat to the health and safety of the persons working inthe 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 accountof 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. 146HL] of strict liability would apply in India but without any exceptions whatsoever recognisedin England. The Court also ruled that the measure of compensation must be correlated tothe magnitude and capacity of the enterprise because such compensation must have adeterrent effect.

Answer 5(c)

In order to control the noise pollution caused from various sources such as industrialactivity, construction activity, generator sets, loud speakers, public address system,music systems, vehicular horns and other mechanical devices the Central Governmenthas framed certain rules known as ‘The Noise Pollution (Regulation and Control) Rules,2000. The rules provide for the ambient air quality standard in respect of noise for differentareas/zones. An area comprising 100 metres around hospitals, educational institutionsand courts has been declared as the silence area/zone. The ambient air quality standardsshall also be considered by the all development authorities, local bodies while taking anydevelopment activity. A loud speaker or a public address system shall not be used atnight (between 10:00 p.m. to 6:00 a.m.) except in closed premises for communication.Whoever commits any offence of playing music or uses any sound amplifiers, beats adrum or blows a horn, etc. in a silence zone/area shall be liable to a penalty.

PART B

(Answer ANY TWO questions from this part.)

Question 6

Write notes on any four of the following :

(i) ‘Forfeiture of gratuity’ under the Payment of Gratuity Act, 1972.

(ii) ‘Employment injury’ under the Employees’ State Insurance Act, 1948.

(iii) ‘Manufacturing process’ under the Factories Act, 1948.

(iv) ‘Partial disablement’ under the Workmen’s Compensation Act, 1923.


(v) ‘General prohibition of strikes and lock-outs’ under the Industrial DisputesAct, 1947.

(vi) ‘Temporary application of model standing orders’ under the IndustrialEmployment (Standing Orders) Act, 1946. (5 marks each)

Answer 6(i)

Forfeiture of Gratuity

Forfeiture of gratuity has been dealt with in two parts under the Payment of GratuityAct, 1972:

(a) Forfeiture to the extent of the damage : Section 4(6)(a) provides that the gratuityof an employee whose services have been terminated for any act of willful omissionor negligence causing any damage or loss to, or destruction of, property belongingto the employer, gratuity shall be forfeited to the extent of the damage or loss socaused.

(b) Circumstances under which gratuity can be forfeited : Section 4(6)(b) of the Actenvisages the circumstances under which gratuity of an employee may beforfeited. It says gratuity payable to an employee may be wholly or partiallyforfeited if the services of an employee have been terminated for:

(i) his riotous and disorderly conduct or any other act of violence on his part, or

(ii) any act which constitutes an offence involving moral turpitude provided thatsuch offence is committed by him in the course of his employment.

In such cases the gratuity payable to the employee may be wholly or partially forfeited.Where the services have not been terminated on any of the above grounds, the employercannot withhold gratuity due to the employee.

Answer 6(ii)

Employment Injury

Employment injury under Section 2(8) of the E.S.I. Act,1948 means “a personalinjury to an employee caused by accident or an occupational disease arising out of and inthe course of his employment, being an insurable employment, whether the accidentoccurs or the occupational disease is contracted within or outside the territorial limits ofIndia”.

It is well settled that an employment injury need not necessarily be confined to anyinjury sustained by a person within the premises or the concern where a person works.Whether in a particular case the theory of notional extension of employment would take inthe time and place of accident so as to bring it within an employment injury, will have todepend on the assessment of several factors. There should be a nexus between thecircumstances of the accident and the employment. On facts no case could be anauthority for another case, since there would necessarily be some differences betweenthe two cases. Therefore, each case has to be decided on its own facts. It is sufficient ifit is proved, that the injury to the employee was caused by an accident arising out of andin the course of employment no matter when and where it occurred. There is not even a


geographical limitation. The accident may occur within or outside the territorial limits ofIndia. However, there should be a nexus or casual connection between the accident andemployment (Regional Director, E.S.I. Corpn. v. L. Ranga Rao, 1982 I-L.L.J. 29).

Answer 6(iii)

Manufacturing Process

Manufacturing process under Section 2(k) of the Factories Act, 1948 means any processfor

(i) making, altering, repairing, ornamenting, finishing, packing, oiling, washing,cleaning, breaking up, demolishing, or otherwise, treating or adopting any articleor substance with a view to its use, sale, transport, delivery or disposal; or

(ii) pumping oil, water or sewage or any other substance; or

(iii) generating, transforming, transmitting power; or

(iv) composing types for printing, printing by letter-press, lithography, photogravureor other similar process, or book-binding; or

(v) constructing, reconstructing, repairing, refitting, finishing or breaking up ships orvessels; or

(vi) preserving or storing any article in cold storage.

The definition is quite important and it has been the subject of judicial interpretationin large number of cases. The Madras High Court in the case of In re. SeshadrinathaSarma, 1966 (2) LLJ 235, held that to constitute a manufacture there should not beessentially some kind of transformation of substance and the article need not becomecommercially as another and different article from that at which it begins its existence solong as there has been an indisputable transformation of substance by the use of machineryand transformed substance is commercially marketable.

Division Bench of A.P. High Court held that to determine where certain premises isfactory, it is necessary that it should carry on manufacturing process and it does notrequire that the process should end in a substance being manufactured [Alkali Metals (P)Ltd. v. ESI Corpn., 1976 Lab.I.C.186].

Answer 6(iv)

Partial Disablement

Disablement means loss of capacity to work or to move. The Workmen’sCompensation Act, 1923 (renamed as the Employees’ Compensation Act, 1923) doesnot define the word ‘disablement’, but defines partial disablement under Section 2(1)(g).Partial disablement may be temporary or permanent.

“Partial disablement” means, where the disablement is of a temporary nature, suchdisablement as reduces the earning capacity of a workman in any employment in whichhe was engaged at the time of the accident resulting in the disablement, and, where thedisablement is of a permanent nature, such disablement as reduces his earning capacityin every employment which he was capable of undertaking at that time.


The distinction between these two types of disablement depends on the fact as towhether an injury results in reduction of earning capacity in all the employments whichthe workman was capable of undertaking or only in that particular employment in whichhe was engaged at the time of injury. The type of disablement suffered can be determinedonly from the facts of a case. But it is provided by the Act that injuries specified in PartII of Schedule I shall be deemed to result in permanent partial disablement. These injuriesare known as scheduled injuries.

Answer 6(v)

General Prohibition of Strikes and Lock-outs

The Industrial Disputes Act, 1947 does not grant an unrestricted right of strike orlock-out. Under Section 10(3) and Section 10A(4A) of the Act, the Government isempowered to issue order for prohibiting continuance of strike or lock-out. The generalprovisions prohibiting strikes and lock –outs have been laid down in Sections 23 of theIndustrial Disputes Act, 1947.

As per Section 23 of the Industrial Disputes Act, 1947 no workman who is employedin any industrial establishment shall go on strike in breach of contract and no employer ofany such workman shall declare a lock-out:

(a) during the pendency of conciliation proceedings before a Board and seven daysthe conclusion of such proceedings;

(b) during the pendency of proceedings before a Labour Court, Tribunal or NationalTribunal and two months after the conclusion of such proceedings;

(bb) during the pendency of arbitration proceedings before an arbitrator and two monthsafter the conclusion of such proceedings, where a notification has been issuedunder sub-section (3A) of Section 10A; or

(c) during any period in which a settlement or award is in operation, in respect of anyof the matters covered by the settlement or award.

The purpose of above provisions is to ensure peaceful atmosphere during the pendencyof any proceedings before a Conciliation Officer, Labour Court, Tribunal or National Tribunalor Arbitrator under Section 10A.

Answer 6(vi)

Temporary Application of Model 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.

The matters prescribed in the Schedule to the Act are called Model Standing Orders.Section 12-A provides that for the period commencing on the date on which this Actbecomes applicable to an industrial establishment and ending with the date on which theStanding Orders as finally certified under this Act come into operation in that establishment,the prescribed model standing orders shall be deemed to be adopted in that establishment.

Within 6 months from the date on which the Act becomes applicable to an industrial


establishment the employer is required to frame draft ‘standing orders’ and submit themto the Certifying Officer for certification. The draft should cover all matters specified inthe Schedule to the Act and any other matter that Government may prescribe by rules.

Question 7

(a) Distinguish between any two of the following :

(i) ‘Arbitration’ and ‘conciliation’ for the resolution of industrial disputesunder the Industrial Disputes Act, 1947.

(ii) ‘Lay-off’ and ‘lock-out’ under the Industrial Disputes Act, 1947.

(iii) ‘Principal employer’ and ‘contractor’ under the Contract Labour (Regulationand Abolition) Act, 1970.

(iv) ‘Committee method’ and ‘notification method’ for the fixation of minimumwages under the Minimum Wages Act, 1948. (5 marks each)


(i) The Payment of Bonus Act, 1965 is applicable to every factory andto every other establishment where are employed onany day during an accounting year.

(ii) All contributions paid under the Employees' State Insurance Act, 1948and other moneys received on behalf of the ESI Corporation shall bepaid into a fund called .

(iii) The employer shall arrange to pay the amount of gratuity within days from the date of its becoming payable to the

person to whom it is payable.

(iv) Under the Employees Deposit-linked Insurance Scheme, employers arerequired to pay contributions for the insurance fund at the rate of

of the total emoluments.

(v) The Contract Labour (Regulation and Abolition) Act, 1970 shall notapply to establishments in which work only of isperformed. (1 mark each)

(c) Write the most appropriate answer from the given options in respect of thefollowing:

(i) An employee is not entitled to bonus if —

(a) He has worked for less than 6 months

(b) He is guilty of any misconduct

(c) He is in managerial cadre

(d) He is a part-time permanent employee.

(ii) The Employees’ Provident Fund and Miscellaneous Provisions Act,1952 is applicable to all factories and certain establishments employing—

(a) 20 or more persons


(b) 50 or more persons

(c) 10 or more persons

(d) Without any limit.

(iii) Compensation under the Workmen’s Compensation Act, 1923 becomesdue —

(a) On the date of death/accident of the workman

(b) On the date of order of the Commissioner for workmen’scompensation

(c) On the completion of one month from the date of accident

(d) On demand from the workman.

(iv) The employment of contract labour can be prohibited —

(a) By an order of the labour court

(b) By notification of the Government

(c) When the number of workmen exceeds 50

(d) By the Central Advisory Board.

(v) The interpretation of certified standing orders is within the jurisdictionof —

(a) Labour court

(b) Certifying officer

(c) Workmen

(d) Employer and workmen. (1 mark each)

Answer 7(a)(i)

Arbitration and Conciliation

Arbitration is a procedure in which a dispute is submitted, by agreement of the parties,to one or more arbitrators who make a binding decision on the dispute. In choosingarbitration, the parties opt for a private dispute resolution procedure instead of going tocourt.

The circumstances under which an industrial dispute may be voluntarily referred toarbitration have been stipulated under Section 10A of the Industrial Disputes Act, 1947.

Conciliation is the most important method for prevention and settlement of industrialdisputes through third party intervention. It is an attempt to reconcile the views of thedisputants and bring them to an agreement.

Conciliation may be described as “the practice by which the services of a neutralthird party are used in a dispute as a means of helping the disputing parties to reduce theextent of their differences and to arrive at an amicable settlement or agreed solution. It isa process of rational and orderly discussion of differences between the parties to adispute under the guidance of a conciliator”.


Conciliation officers & Boards of Conciliation: Under the Industrial Disputes Act,1947 the appropriate Government is authorized to appoint Conciliation Officers as well asa Board of Conciliation for mediating in and promoting the settlement of industrialdisputes [Section 4 &5]. The main objective of appointing the Conciliation Officers, bythe appropriate Government, is to create congenial atmosphere within the establishmentwhere workers and employers can reconcile on their disputes through the mediation ofthe Conciliation Officers.

Answer 7(a)(ii)

Lay-off and Lock-out

(1) In lay-off, the employer refuses to give employment due to certain specifiedreasons, but in lock-out, there is deliberate closure of the business and employerlocks out the workers not due to any such reasons.

(2) In lay-off, the business continues, but in lock-out, the place of business is closeddown for the time being.

(3) In a lock-out, there is no question of any wages or compensation being paidunless the lock-out is held to be unjustified.

(4) Lay-off is the result of trade reasons but lock-out is a weapon of collectivebargaining.

(5) Lock-out is subject to certain restrictions and penalties but it is not so in case oflay-off.

However, both are of temporary nature and in both cases the contract of employmentis not terminated but remains in suspended animation.

Answer 7(a)(iii)

Principal Employer and Contractor

As per Section 2(1)(g) of the Contract Labour (Regulation and Abolition) Act,1970“principal employer” means

(i) In relation to any office or department of the Government or a local authority, thehead of that office or department or such other officer as the Government or thelocal authority, as the case may be, may specify in this behalf.

(ii) In a factory, the owner or occupier of the factory and where a person has beennamed as the manager of the factory under the Factories Act, 1948, the personso named.

(iii) In a mine, the owner or agent of the mine and where a person has been named asthe manager of the mine, the person so named.

(iv) in any other establishment, any person responsible for the supervision and controlof the establishment.

The Explanation appended to the section states that for the purpose of sub-clause (iii) of this clause, the expressions mine, owner and agent shall have the meanings


respectively assigned to them in clause (j) clause (l) and clause (c) of sub-section (l) ofSection 2 of the Mines Act, 1952.

As per Section 2(1)(c) of the Act, “contractor” in relation to an establishment, meansa person who undertakes to produce a given result for the establishment, other than amere supply of goods or articles of manufacture to such establishment, through contractlabour or who supplies contract labour for any work of the establishment and includes asub-contractor.

Answer 7(a)(iv)

Committee Method & Notification Method

As per section 5 of the Minimum Wages Act, 1948 in fixing minimum rates of wagesin respect of any scheduled employment for the first time or in revising minimum rates ofwages, the appropriate Government can follow either ‘committee method’ or ̀ notificationmethod’.

Committee Method : Under this method, the appropriate Government may appointas many committees and sub-committees as it considers necessary to hold enquiriesand advise it in respect of such fixation or revision as the case may be. After consideringthe advise of the committee or committees, the appropriate Government shall, bynotification in the Official Gazette fix or revise the minimum rates of wages. The wagerates shall come into force from such date as may be specified in the notification. If nodate is specified, wage rates shall come into force on the expiry of three months from thedate of the issue of the notification.

Notification Method : When fixing minimum wages under Section 5(1)(b), theappropriate Government shall by notification, in the Official Gazette publish its proposalsfor the information of persons likely to be affected thereby and specify a date not lessthan 2 months from the date of notification, on which the proposals will be taken intoconsideration.

The representations received will be considered by the appropriate Government. Itwill also consult the Advisory Board constituted under Section 7 and thereafter fix orrevise the minimum rates of wages by notification in the Official Gazette. The new wagerates shall come into force from such date as may be specified in the notification.However, if no date is specified, the notification shall come into force on expiry of threemonths from the date of its issue. [Section 5(1)(b)]

Answer 7(b)

(i) The Payment of Bonus Act, 1965 is applicable to every factory and toevery other establishment where 20 or more persons are employed onany day during an accounting year.

(ii) All contributions paid under the Employees' State Insurance Act, 1948 andother moneys received on behalf of the ESI Corporation shall be paid intoa fund called Employees’ State Insurance Fund .

(iii) The employer shall arrange to pay the amount of gratuity within 30 days


from the date of its becoming payable to the person to whom it ispayable.

(iv) Under the Employees Deposit-linked Insurance Scheme, employers arerequired to pay contributions for the insurance fund at the rate of 1% ofthe total emoluments.

(v) The Contract Labour (Regulation and Abolition) Act, 1970 shall not applyto establishments in which work only of an intermittent or casual natureis performed.

Answer 7(c)(i)

(b) He is guilty of any misconduct

Answer 7(c)(ii)

(a) 20 or more persons

Answer 7(c)(iii)

(a) On the date of death/accident of the workman

Answer 7(c)(iv)

(b) By notification of the Government

Answer 7(c)(v)

(a) Labour Court

Question 8Attempt any five of the following stating relevant legal provisions and decidedcase law, if any :

(i) Raghu, on retirement, has withdrawn the entire amount of hisaccumulation in the provident fund. Later on, he was re-appointed fora fixed tenure. The provident fund inspector claimed contribution inrespect of the salary paid to Raghu. Is the demand made by theinspector tenable in law ?

(ii) XYZ Ltd., employing more than 50 workmen in its factory, failed toregister itself and pay contributions under the Employees’ StateInsurance Act, 1948. The inspector of the ESI Corporation issued anotice to the company and directed it to register and pay contributionstowards its employees. On failure to comply with the terms of notice,ESI Corporation determined the contributions payable by the companyand demanded payment with interest and penalty. The companydisputed its liability and asked the ESI Corporation to approach theESI Court for adjudication of the claim. Is the company justified ?

(iii) Sooraj Hospital has a laundry in its premises to ensure a high degreeof hygiene standard for washing the linen used in the hospital. Theemployees of the hospital work in the laundry and the laundry cannot


be separated from the hospital. The inspector of factories issued anotice to Sooraj Hospital to register it as a factory. Is he justified ?

(iv) Harish, a mechanic, was alleged to have indulged in an act ofmisconduct. An inquiry was held into the charge against him as perthe procedure laid down in the certified standing orders. The copy ofthe inquiry report was not furnished to him before imposing penalty onthe ground that it was not provided under the certified standing orders.Is the plea of the management tenable in law ?

(v) Lotus Info. Ltd. entered into a settlement with its workmen providingfor payment of gratuity at the rate of one month’s salary for everycompleted year of service. An employee retired on superannuationand claimed gratuity as per the settlement. The employer pleaded thathe is under no obligation to pay gratuity more than the rate prescribedunder the Payment of Gratuity Act, 1972. Is the employer’s contentiontenable in law ?

(vi) A workman was dismissed from service on 15th February, 2009 aftera departmental enquiry for an act of misconduct. No bonus was paidto him for the accounting year during which he was dismissed.Subsequently, he was reinstated by the court with full back wages.Will the workman be entitled to claim bonus alongwith full backwages?

(vii) Amar was the owner of a ginning factory. Certain persons wereengaged in putting the ginned cotton into what was called bojhas andthey were engaged for that work not by the owner but by themerchants who owned cotton. The owner had not entered theirnames in the attendance register of the factory. Are the personsemployed by the merchants covered under the category of ‘workers’under the provisions of the Factories Act, 1948 ? (4 marks each)

Answer 8(i)

The demand made by the Provident Fund Inspector is not in accordance with law.An employee, who has withdrawn the full amount of the accumulation in the providentfund, under Clause (a) or (b) of para 69(1) of the Provident Fund Scheme, is an excludedemployee. As per the provisions of the para 69 of the Scheme, “a member may withdrawthe full amount standing to his credit in the fund (i) on retirement from service afterattaining the age of 55 years”.

When an employee has withdrawn the full amount of accumulation of the providentfund, there is no question of any P.F. dues in respect of such an employee upon his re-appointment. This has been held by the Bombay High Court in Bombay Printers Ltd. &Others v. Union of India & Others (1992) (1) LLJ 8160.

Answer 8(ii)

The company is not justified. In ESIC v. F. Fibre Bangalore Pvt. Ltd., [1997 (II) LLJ739, SCC 625], it was held that Section 45A of the ESI Act, 1948 empowers theEmployees State Insurance Corporation to determine the contribution payable by the


employer. Though Section 75 of the Act does not envisages as to who has to approachthe Employees Insurance Court, by necessary implication when the employer denies theliability or applicability of the provisions of the Act, it is for the employer to approach theEmployees Insurance Court and seek adjudication.

Answer 8(iii)

The Inspector of Factories is not justified in his action. The facts of the case arealmost based on the case Dr. P S S Sundar Rao v. Inspector of Factories, Vellore –1984 (II) LLJ 237 Madras.

In this case the Madras High Court held that the laundry is only a subsidiary, minor orincidental establishment of the hospital which is not a factory. One department of thehospital established for the efficient functioning of the hospital cannot therefore be disjoinedfrom the main institution and termed to be a factory. The paramount or the primarycharacter of the main institution alone has to be taken into consideration and when themain institution is not a factory, a department thereof cannot become so, even though amanufacturing process is carried on there.

The persons working in the laundry are not exclusively employed in the laundry.They are the employees of the hospital doing all kinds of work in connection with thehospital in the various departments of the hospital, who are by turns asked to do the workin the laundry. They are not therefore workers within the meaning of S. 2(1) of the FactoriesAct and hence the laundry in the Sooraj Hospital is not a factory as defined in the Act.

Answer 8(iv)

The stand of the management is not justified. It is not a valid defence to commitbreach of principles of natural justice simply because such a provision does not findplace in the standing orders. The sweep of natural justice is too wide and it can be readconsistently with standing orders. Even if the standing orders do not so require, a copymust be supplied in obedience to the principles of natural justice. Failure to supply copyof the report will leave material infirmity in the proceedings. [Shriram Yadav v. RajasthanState Road Transport Corporation, Jaipur & Others – 1996 (III) LLJ 1144 Raj.].

Answer 8(v)

The employers’ contention is not tenable in Law. Section 4(5) of the Payment ofGratuity Act, 1972 provides that nothing contained in the section shall affect the right ofan employee to receive better terms of gratuity under any award or settlement or contract.This provision can be invoked by the employee and not by employer, as per the order ofthe Kerala High Court in case of Raveendranatha Prabhu v. Rajasthan,[(1998) (I) LLJ204].

Answer 8(vi)

The workman would be entitled to claim bonus along with full back wages. As theLabour Court has set aside the dismissal order and awarded reinstatement with full backwages, the worker is deemed to be in service during the period of his dismissal and isentitled to bonus.

An employee suspended but subsequently reinstated with full back wages can notbe treated to be ineligible for bonus for the period of suspension. Project Manager,Ahmedabad Project, ONGC v. Sham Kumar Sahegal (1995) 1 LLJ 863]


The Supreme Court in Gammon India Ltd. v. Niranjan Dass, AIR 1984 SC 500, heldthat the Respondent would be entitled to all back wages including the benefit of revisedwages or salary if during the period there is revision of pay-scales with yearly increment,revised dearness allowance or variable dearness allowance and all terminal benefits if hehas reached the age of superannuation such as Provident Fund, Gratuity etc. Backwages should be calculated as if the respondent continued in service uninterrupted. He isalso entitled to leave encashment and bonus if other workmen in the same category werepaid the same.

Answer 8(vii)

The persons employed by the merchants are covered in the category of workersunder the provisions of the Factories Act, 1948 as the work performed is incidental to orconnected with, the manufacturing process.[Local Government v. Nauserwanji, AIR1933 Nag. 283.]

EP–SLC – December 2011 44

SECURITIES LAWS AND COMPLIANCES

Time allowed : 3 hours Maximum marks : 100PART A

(Answer Question No. 1 which is COMPULSORYand any three of the rest from this part)

Question 1


(i) Hedge funds are similar to mutual funds.

(ii) Orders of SEBI are appealable before the Securities Appellate Tribunal.

(iii) A listed company is required to appoint compliance officer.

(iv) Depository participants are subjected to audit.

(v) Green shoe option is a stabilisation tool. (2 marks each)

(b) Re-write the following sentences after filling-in the blank spaces withappropriate words(s)/figure(s) :

(i) Clause 49 of the listing agreement deals with .(ii) Government securities are issued by on behalf of the

government.

(iii) Equity linked saving schemes now have lock-in-period of ______years.

(iv) Mandatory client code facilitates .

(v) Securities are traded for immediate delivery and payment in the. (1 mark each)

Answer 1(a)(i)

True

Hedge Funds are similar to mutual funds as both entities issue units or securitiesto investors and holds pool of securities to diversify investment.

Answer 1(a)(ii)

True

Under the SEBI Act, 1992, any person aggrieved by the order to the SEBImay refer an appeal to a Securities Appellate Tribunal having jurisdiction in thematter.

Answer 1(a)(iii)

True

Clause 47(a) of Equity Listing Agreement requires issuer company to appointCompany Secretary of the issuer as Compliance Officer of the company who isresponsible for monitoring the share transfer process and report to the Company’sBoard in each meeting.

44

45 EP–SLC – December 2011

Answer 1(a)(iv)

True

The two depositories National Securities Depository Limited and CentralDepository Securities Limited provides for audit of the Depositary Participants fromPracticing Company Secretary or Chartered Accountants.

Answer 1(a)(v)

True

Green Shoe Option means an option for allocating shares in excess of theshares included in the public issue and operating a post-listing price stabilizingmechanism in accordance with SEBI (ICDR) Regulations 2009 and it helps instabilizing post listing price of shares.

Answer 1(b)

(i) Clause 49 of the listing agreement deals with compliance of conditions forCorporate Governance norms.

(ii) Government Securities are issued by Reserve Bank of India on behalf ofthe Government.

(iii) Equity linked saving schemes now have lock in period of three years.

(iv) Mandatory client code facilitates identity of buyers and sellers ofsecurities and improves market surveillance.

(v) Securities are traded for immediate delivery and payment in the spot market.

Question 2

(a) Write short notes on any four of the following :

(i) Certificate of deposit

(ii) Hybrid instruments

(iii) Commodity bonds

(iv) Clearing corporation

(v) Debenture trustee. (3 marks each)

(b) Expand the following abbreviations :

(i) ETF

(ii) QIP

(iii) ECN. (1 mark each)

Answer 2(a)(i)

Certificate of Deposits

Certificate of Deposits (CDs) is a negotiable money market instrument and issued indematerialized form or as a Usance Promissory Note for funds deposited at a bank or


other eligible financial institution for a specified time period. Issue of CDs are governedby Reserve Bank of India.

Answer 2(a)(ii)

Hybrid Instruments

Hybrid Instruments are instruments which are created by combining the features ofequity and debt e.g. Convertible preference shares, Cumulative convertible preferenceshares, non-convertible debentures with equity warrant, partly convertible debentures,Optionally convertible debenture, warrants convertible into debentures or shares, securedpremium notes with warrants etc.

Answer 2(a)(iii)

Commodity bonds

Commodity bonds are bonds issued to share the risk and profitability of futurecommodity prices with the investor. For example petro bonds, silver bonds, gold bondsand coal bonds. A petro bonds may carry a fixed rate of interest with part of the facevalue of the bonds denominated in barrels of oil. There would be a floor in the face valueof the bond. In view of the upside profit potential in oil prices, the interest rate could belower than the market rate of interest.

Answer 2(a)(iv)

Clearing Corporation

Under section 8A(1) of Securities Contract (Regulations) Act, 1956 provides that arecognized stock exchange may with the prior approval of SEBI transfer the duties andfunctions of a clearing house to a clearing corporation, being a company incorporatedunder the Companies Act, 1956 for the purpose of

- the periodical settlement of contracts;

- the delivery of and payment for securities;

- any other matter incidental to or connected with such transfer.

Answer 2(a)(v)

Debenture Trustee

Debenture Trustee is a trustee of a trust deed for securing any issue of debenturesof a body corporate. No company can issue a prospectus or letter of offer to the publicfor subscription of its debentures, unless the company has appointed one or moredebenture trustees for such debentures in accordance with the provisions of theCompanies Act, 1956.

Answer 2(b)

(i) ETF- Exchange Traded Funds

(ii) QIP- Qualified Institutional Placement

(iii) ECN- Electronic Communication Network / Electronic Contract Note


Question 3

(a) “Credit rating establishes a link between risk and return.” Discuss. (4 marks)

(b) Explain briefly the role and responsibilities of Registrar and Transfer Agent(RTA) in an IPO. (4 marks)

(c) You are Company Secretary of All Season Travels Ltd., which being listedon the stock exchange after an IPO is made by the company. Your Boardof directors desires to understand about the compliance requirements underClause 41 of the listing agreement. Write a Board note on ‘Clause 41of the listing agreement’. (7 marks)

Answer 3(a)

Credit rating in general sense is the evaluation of the credit worthiness of anindividual or of a business based on relevant factors indicating ability and willingnessto pay obligations as well as net worth. Credit rating establishes a link betweenrisk and return. An investor or any other interested person uses the rating to assessthe risk level and compares the offered rate of return with his expected rate ofreturn. Credit rating is extremely important as it not only plays a role in investorprotection but also benefits industry as a whole in terms of direct mobilization ofsavings from individuals.

Answer 3(b)

Registrars to an issues means the person appointed by a body corporate orany person or group of persons to carry on the following activities on its or hisor their behalf i.e.

• Collecting application for investor in respect of an issue;

• Keeping a proper record of applications and monies received from investorsor paid to the seller of the securities;

• Assisting in determining the basis of allotment of the securities inconsultation with the stock exchanges;

• Finalizing the list of person entitled to allotment of securities;

• Processing and despatchment of allotment letters, refund orders or certificatesand other related documents in respect of the Issue.

A share transfer agent provides services relating to Transfer of shares,Transmission,Nomination,Issue of duplicate certificate’Split, consolidation of certificate,Dispatch of interest/dividend warrant etc.

Answer 3(c)

To : The Board of DirectorsAll Seasons Travels Limited

Sub.: Compliance Requirements under Clause 41 of the Listing Agreement

Clause 41 one of the most important requirements of the listing agreement,deals with submission of financial results to Stock Exchanges. The company has


an option to submit audited or unaudited quarterly and year to date financial resultsto the stock exchange with in one month of each quarter (other than the last quarter)subject to other conditions prescribed in listing agreement. In respect of last quarter,the company has an option either to submit unaudited financial results for the quarterwithin time period prescribed or to submit the financial results for the entire financialyear within prescribed period at the of the financial year.

• In case the company opts to submit unaudited financial results for the lastquarter, it shall also submit audited financial year as soon as they areapproved by the board. Such unaudited financial statement for the last quartershall also be subjected to limited review. A copy of the limited review reportshall be furnished to the stock exchange.

• In case of the company opts to submit audited financial results for theentire financial year, it shall intimate the stock exchange in writing withinprescribed period of the end of financial year.

To comply with the requirements of publishing quarterly results, the followingaction has to be taken :

- Intimate to Stock Exchange at least 7 days in advance about the dateof Board Meeting

- Along with the intimation, a press release has to be issued immediatelyin at least one national newspaper and one regional language newspaperabout the date of the Board Meeting

- Send by fax with 15 minutes of the conclusion of the Board Meeting thefinancial results to the stock exchange

- Publish within 48 hours of the conclusion of the Board Meeting in at leastone English daily newspaper circulating in the whole of India and in onenewspaper published in the language of the region, where the registeredoffice of the company is situated.

- After publishing the results, send a copy of the published results to stockexchange(s).

Submitted please.

Sd/-

XYZ

Company Secretary

Question 4

Comment briefly on any five of the following statements :

(i) “The securities market has two interdependent and inseparable segments.”

(ii) “There are a large number of participants in the money market.”

(iii) “Derivative contracts are of various types.”


(iv) “Collective investment scheme is constituted as trust.”

(v) “Venture capital funds invest in all types of securities.”

(vi) “Dematerialisation and immobilisation are distinct activities.”(3 marks each)

Answer 4(i)

The Securities Market has two interdependent and inseparable segments, thenew issues (primary) market and the stock (secondary) market.

The Primary market provides the channel for sale of new securities. The issuerof securities sells the securities in the primary market to raise funds forinvestment and/or to discharge some obligation.

The Secondary market deals in securities previously issued. The secondarymarket enables those who hold securities to adjust their holdings in response tocharges in their assessment of risk and return. They also sell securities for cashto meet their liquidity needs.

Answer 4(ii)

There are a large number of participants in the money market like commercialbanks, mutual funds, investment institutions, financial institutions and Reserve bankof India. The bank’s operations ensure that the liquidity and short term rates aremaintained at levels consistent with the objective of maintaining price and exchangerate stability. The money market can obtain the funds from the central bank eitherby borrowing or through sale of securities.

Answer 4(iii)

A derivative instrument is a contract between two parties that specifies conditions(especially the dates the resulting values of the underlying variables) under whichpayments, or payoffs, are to be made between the parties. The most commonlyused derivatives contracts are Forwards : A forward contract is a customizedcontract between two entities, where settlement takes place on a specific date inthe future at today's pre-agreed price. Futures : A futures contract is an agreementbetween two parties to buy or sell an asset at a certain time in the future at acertain price. Options : Options are of two types - calls and puts. Swaps : Swapsare private agreements between two parties to exchange cash flows in the futureaccording to a prearranged formula.

Answer 4(iv)

A collective investment scheme is constituted in the form of a trust andinstrument of trust should be in the form of a deed duly registered under theprovisions of the Indian Registration, Act, 1908, executed by the collectiveinvestment management company in favor of the trustees named in such aninstrument. It can appoint a trustee to hold the assets of the scheme for the benefitof unit holders.

Answer 4(v)

A venture capitalist is a person or investment firm that makes ventureinvestments, and these venture capitalists are expected to bring managerial and


technical expertise as well as capital to their investments. SEBI (Venture CapitalFund) Regulations, place some restrictions on Investment by venture capital firmsuch as disclosure of investment strategy at the time of application for registration.VCshall not invest more than 25% corpus of the fund in one venture capital undertaking.Venture capital fund may invest in securities of foreign companies subject to suchconditions or guidelines that may be stipulated or issued by the Reserve Bankof India and the Board from time to time. VCF regulations also provide that fundsshall not invest in the associated companies.

Answer 4(vi)

Dematerialisation and Immobilisation are distict activities. Dematerialisation isthe process by which shares in the physical/paper form are cancelled and creditsin the form of electronic balances are maintained on highly secure system at thedepository.

Immobilisation of securities, on the other hand, occurs when physical securitycertificates are stored or lodged with depository for safe custody. All subsequenttransaction in these securities take place in book-entry form. The actual owner hasthe right to withdraw their physical securities as and when desired. Theimmobilization of fresh issue may be achieved by issuing a jumbo certificaterepresenting the entire issue in the name of depository, as nominee of the beneficialowners.

Question 5

(a) Distinguish between any three of the following :

(i) ‘Spot delivery’ and ‘special delivery’.

(ii) ‘Book closure’ and ‘record date’.

(iii) ‘Pay-in’ and ‘pay-out’.

(iv) ‘Forwards’ and ‘futures’. (3 marks each)

(b) Explain briefly the following terms associated with securities market :

(i) Basket trading system

(ii) Trading volume

(iii) Trading cycle. (2 mark each)

Answer 5(a)(i)

‘Spot delivery’ and ‘Special delivery’

The delivery is said to be spot delivery if the delivery of an payment for securitiesare to be made on the same day or next day.

A special delivery is one where the delivery is to be made after the delivery periodfixed by the stock exchange authorities.


Answer 5(a)(ii)

‘Book closure’ and ’Record date’

Book closure is the period for closure of the Register of Members and TransferBooks of the company, to take a record of the shareholders to determine their entitlementto dividends or to bonus or rights share or any other rights pertaining to shares. Inaccordance with the section 154 of the Companies Act, 1956, a company may closeregister of members for a maximum of 45 days in a year and for not more than 30 daysat any one time. Whereas record date is the date on which the records of a company areclosed for the purpose of determining the stock holders to whom dividends, proxies’rights etc. are to be sent

Answer 5(a)(iii)

'Pay-in' and 'Pay-out'

'Pay-in" and 'Pay-out' may be in the form of funds & securities. Pay-in-of fundsrefers to the transfer of money by broker to exchange towards settlement dues for thatparticular day/transfer of money from exchange to broker towards settlement dues forthat particular day referred to as Pay-out of Funds.

Pay in and Payout of Securities refers to transfer of stocks from client's demataccount to broker's / clearing member's account and thereby the broker / clearing memberwill transfer those stocks to the exchange for settlement.

Pay out of securities, on the other hand, refers to transfer of stocks by broker fromhis pool account to client's demat a/c.

Answer 5(a)(iv)

'Forwards' and 'Futures'

Forward contract is a customized contract between two parties, where settlementtakes place on a specified date in future at a price agreed today.

Futures is a contract to buy or sell an underlying financial instrument at a specifiedfuture date an agreed price (strike price) quoted when the contract is entered.

Answer 5(b)(i)

Basket Trading System

In basket trading system, the investors through the member-brokers of the Exchangesare able to buy / sell all scrips of respective indices in one go in the proportion of theirrespective weights in the Index i.e. Sensex, Nifty etc. If we take the example of Sensex,the investors through the member brokers of the BSE are able to buy or sell al 30 scripsof Sensex in one go in the proportion of their respective weights in the Sensex. Theinvestors can also create their own baskets by deleting certain scripts from 30 scrips inthe sensex.

Answer 5(b)(ii)

Trading Volume

Trading volume is sum of buying and selling of securities in the market. The high


trading volume is built on rising prices similarity the trading volume is also linked withfall in prices. They reflect bullish and bearish trend.

Answer 5(b)(iii)

Trading Cycle

Trading Cycle refers to time involved between execution of a transaction andsettlement of the transaction. The time involved in trading mechanism is called tradingcycle.

PART B(Answer ANY TWO questions from this part.)

Question 6

(a) Explain briefly any four of the following statements :

(i) “FCCB and ECB are different modes for raising foreign capital.”

(ii) “Debt market in India comprises of two segments.”

(iii) “IDR and GDR have distinct features.”

(iv) “Investor Education and Protection Fund is set-up in the interest ofinvestors.”

(v) “Public issue aims at selling and marketing of shares to public.”(3 marks each)

(b) You are Company Secretary of Golden Securities Ltd. The Board of directorswants to make a rights issue of shares to its existing shareholders in theratio of 2 shares for every single share held by a shareholder. Preparea qualitative note highlighting the steps involved in the issue of rights shares.

(8 marks)

Answer 6(a)(i)

FCCB and ECB are two different modes for raising capital foreign sources

Foreign Currency Convertible Bonds (FCCBs) - means bonds issued inaccordance with the FCCBs and Ordinary Shares (Through Depository ReceiptMechanism) Scheme, 1993 and subscribed by a non-resident in foreign currencyand convertible into ordinary shares of the issuing company in any manner, eitherin whole or in part of the basis of any equity related warrants attached to debtinstruments. External Commercial Borrowings are one of the modes for sourcingof funds for corporates. External Commercial Borrowings (ECB) include commercialbank loans, buyer’s credit, suppliers credit, securitized instruments such as floatingrate notes and fixed rate bonds. ECB can be accessed under two routes, viz.,(i) Automatic Route and (ii) Approval Route.

Answer 6(a)(ii)

The debt market in India comprises mainly two segments viz. the governmentsecurities markets consisting of central government and state government securities,Zero coupon Bonds (ZCBs), floating rate Bonds (FRBs), T- Bills and the corporate


securities market consisting of FI Bonds, PSU Bonds, and Debentures/ Corporatebonds. Government securities form the major part of the market in terms ofoutstanding issues, market capitalization and treating value.

Answer 6(a)(iii)

IDR and GDR have distinct features. IDR means raising the capital from Indianmarket by foreign entity and GDR refers to raising of funds from abroad.

Indian Depository Receipt (IDR) - Indian Depository Receipt means anyinstrument in the form of a depository receipt created by Domestic Depository inIndia against the underlying equity shares of issuing company. Domestic Depositoryfor the purpose means custodian of securities registered with SEBI and authorizedby the issuing company to issue Indian Depository Receipts.

Global Depository Receipts (GDR) constitutes an important source of raisingfunds abroad. They are listed and traded in foreign stock exchanges. They dono carry any voting rights. GDRs offer an advantage that they enable the holdersto convert into number of shares represented by it. Dividends on GDRs are paidin local currency.

Answer 6(a)(iv)

Investor Education and Protection Fund (IEPF) has been established undersection 205C of the Companies Act, 1956 for promotion of Investors and protectingof interest of investors The IEPF stipulate the activities related to investor educationand protection for which the financial sanction can be provided under IEPF whichinclude the following Activities:

• Educating programme through media

• Organization seminars and symposia

• Proposals for registration of voluntary Associations or Institution or otherorganizations engaged in Investor Education and Protection activities.

• Proposals for projects for Investors’ Education and protection includingresearch activities and proposals for financing such projects.

• Coordinating with institutions engaged in Investor education, awareness andprotection activities.

Answer 6(a)(v)

Public issues of shares mean the selling or marketing of shares forsubscription by the issue of prospectus to general public. Company shall alsofulfill the criteria of having at least 1000 prospective allotees in its issue. Forraising capital from the public by the issue of shares, a public company hasto comply with the provisions of the Companies Act, the Securities Contracts(Regulation) Act, 1956 including the rules made there under and the guidelinesand instructions issued by the concerned Government authorities, the StockExchanges and the SEBI etc.


Answer 6(b)

December 31, 2011

Board of Directors

Golden Securities Limited

Sub : Right Issue of Shares

Rights issue as identified in the SEBI (ICDR) Regulations, 2009 is an issueof securities made by an issuer to its existing shareholder as on a particular datefixed by the issuer (i.e. record date). A listed company can not make any issueof security through a rights issue where the aggregate value of securities includingpremium exceeds Rs. 50 lacs. Unless it has field a draft letter of offer with SEBIthrough a Merchant Banker at least 30 days prior to the filing of prospectus withthe designated stock exchange.

The various steps involved for issue of rights share are enumerated below:

(i) Check whether the rights issue is within the authorized share capital ofthe company. If not, steps should be taken to increase the authorized sharecapital.

(ii) In case of a listed company, notify the stock exchange concerned aboutthe date of Board Meeting at which the rights issue is proposed to beconsidered at least 2 days in advance of the meeting.

(iii) Rights issue shall be kept open for at least 15 days and not more than30 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 issueproportion of rights shares.

(vi) Immediately after the Board Meeting notify the concerned Stock Exchangesabout particulars of Board’s decision.

(vii) Forward 6 sets of letter of offer to concerned Stock Exchanges.

(viii) Dispatch letters of offer to shareholders by registered post.

(ix) Check that an advertisement giving date of completion of dispatch of letterof offer has been released in at least an English National Daily, one HindiNational Paper and a Regional Language Daily where registered office ofthe issuer company is situated.

(x) Make arrangement with bankers and Self Certified Syndicate Banks foracceptance 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 ofallotment.


(xiv) Make an application to the Stock Exchange(s) where the company’s sharesare listed for permission of listing of new shares.

Submitted please

Yours faithfully,

XYZ

Company Secretary

Question 7

(a) What is ‘debt security’ ? Describe the different debt market participants.(5 marks)

(b) Discuss the rules for preferential issue of shares by existing listedcompanies. (5 marks)

(c) What are the functions and powers of an Ombudsman ? (5 marks)

(d) Explain briefly the SEBI Regulations for book building. (5 marks)

Answer 7(a)

A tradable form of a loan/ debt is termed as Debt instrument/securities. It pertainsto obligations of issuer with regards to certain future cash flows representing payment ofinterest and principal by the issuer to the holder (legal owner) of the instrument. There arevarious types of fixed income instruments, which cater to the needs of both investors andissues. These instruments can be classified on the basis of Interest, time duration etc.

Debt market Participants

Primary Dealer : Primary dealers are important intermediaries in the governmentsecurities market. There were 18 PD’s operating in the market and they act as underwritersin the primary market and market makers in the secondary market.

Brokers : Brokers plays an important role in secondary debt market by bringingtogether counter parties and negotiating terms of the trade.

Investors: Banks, Insurance companies, Provident funds, Mutual funds, Trusts etc.

Answer 7(b)

(1) A listed issuer may make a preferential issue of specified shares/securities, if:

• a special resolution has been passed by its shareholders;

• all the equity shares, if any, held by the proposed allottees in the issuer arein dematerialized form;

• the issuer is in compliance with the conditions for continuous listing ofequity shares as specified in the listing agreement with the recognizedstock exchange where the equity shares of the issuer are listed;

• the issuer has obtained the Permanent Account Number of the proposedallottees.


(2) The issuer shall not make preferential issue of specified securities to any personwho has sold any equity shares of the issuer during the six months precedingthe relevant date.

(3) Any person belonging to promoter(s) or the promoter group has previouslysubscribed to warrants of an issuer but failed to exercise the warrants, thepromoter(s) and promoter group shall be ineligible for issue of specified securitiesof such issuer on preferential basis for a period of one year from:

• the date of expiry of the tenure of the warrants due to non-exercise of theoption to convert; or

• the date of cancellation of the warrants.

Answer 7(c)

The Ombudsman has the following powers and functions :

(a) to receive complaints specified under SEBI (Ombudsman) Regulation againstany intermediary or a listed company or both

(b) to consider such complaints and facilitate resolution thereof by amicablesettlement;

(c) to approve a friendly or amicable settlement of the dispute between the parties;

(d) to adjudicate such complaints in the event of failure of settlement thereof byfriendly or amicable settlement.

The Ombudsman is required to draw up an annual budget for his office in consultationwith the Board and shall incur expenditure within and in accordance with the provisionsof the approved budget and submit an annual report to the SEBI within three months ofthe close of each financial year containing general review of activities of his office. Theombudsman is also under obligation to furnish from time to time such information toSEBI as may be required by SEBI.

Answer 7(d)

SEBI (ICDR) Regulations 2009 defines “Book Building”. It means process undertakenby which a demand for the securities proposed to be issued by a body corporate iselicited and built up and the price for the securities is assessed on the basis of the bidsobtained for the quantum of securities offered for subscription by the issuer. This methodprovides an opportunity to the market to discover the price for securities. The regulationsmainly provide for the following:

• Individual as well as qualified institutional; buyers shall place their bids onlythrough the brokers ‘brokers’ who shall have the right to vet the bids. The applicantshall enclose the proof of DP ID and client ID along with the applications, whilemaking bid.

• During the period the issue is open to the public for bidding, the applicants mayapproach the brokers of the stock exchange/s through which the securities areoffered under on line system, to place an order for bidding to the securities.


• Every broker shall accept orders from all clients/investors who place ordersthrough him. the investors shall have the right to revise their bids provided thatQualified Institutional Buyers shall not be allowed to withdraw their bids after theclosure of the bidding

• There shall be a standard bidding form to ensure uniformity in bidding andaccuracy.

• At the end of each day of the bidding period the demand shall be shown graphicallyon the terminals for information of the syndicate members as well as theinvestors. The identities of the qualified institutional; buyers making the bidding,would however not be made public.

Question 8

Write notes on any five of the following :

(i) Lock-in-period

(ii) Subscription list

(iii) ASBA

(iv) Financial literacy-cum-counselling centre

(v) Delisting of securities

(vi) Fixed income products

(vii) Roadshows in Euro issues. (4 marks each)

Answer 8(i)

Lock in Period

A lock in period is a predetermined time phase during which the holders ofsecurities are not allowed to sell those shares. The various provisions related tolock in period of securities are as under:-

(i) The promoters contribution is subject to lock-in-period of 3 years from thedate of commencement of commercial production or the date of allotmentin the public issue whichever is later.

(ii) Any contribution made by promoters over and above the minimumcontribution shall be subject to a lock-in-period of 1 year in case of allthe companies.

(iii) In case of issue of securities by a listed company on a stock exchangefor atleast 3 years and having a track record of dividend payment foratleast 3 immediately preceding years, promoters’ contribution shall not besubject to lock-in-period.

(iv) If the shares are held by promoters and lent to the stabilizing agent thensuch shares also should be exempted from lock-in-period in requirementsfrom the date of such lending.

(v) Shares under lock-in can be transferred amongst promoters inter sesubject to compliance of SEBI (Substantial Acquisition of Shares andTakeovers).


Answer 8(ii)

Subscription List

The SEBI (ICDR) regulations 2009 provide that a public issue shall be keptopen for at least three working days but not more than ten working days includingthe days for which the issue is kept open in case of revision in price band. Incase the price band in a public issue made through the book building process isrevised, the bidding (issue) period disclosed in the red herring prospectus shall beextended for a minimum period of three working days provided that the totalbidding period shall not exceed ten working days.

Answer 8(iii)

ASBA

ASBA, Applications Supported by Block Amount is a process developed bySEBI for applying to IPO. In ASBA, an IPO applicant's account doesn't getdebited until shares are allotted to him. ASBA is an application containing anauthorization to block the application money in the bank account, for subscribingto an issue. If an investor is applying through ASBA, his application money shallbe debited from the bank account only if his/her application is selected forallotment after the basis of allotment is finalized, or the issue is withdrawn /failed.

Answer 8(iv)

Financial literacy-cum-counselling centre

RBI has set up financial literacy-cum-counseling centre for investor educationin few districts on pilot basis to help individuals find realistic solutions to theirproblems and solution for repayments that are achievable. Centre providesfinancial education and credit counseling. Financial Literacy includes providingfamiliarity with an understanding of financial market products, their rewards as wellas risks, to enable individuals to make informed choices and to take effectiveaction to improve overall well-being and avoid distress in financial matters. CreditCounseling include educating the debtor about credit, budgeting financial managementand imparting negotiating skill with creditors to work out a repayment plan.

Answer 8(v)

Delisting of Securities

A company may delist its equity shares voluntarily from all or from the onlyrecognized stock exchange where they are listed. However, all public shareholdersholding equity shares of the class which are sought to be delisted are given anexit opportunity under SEBI (Delisting of Equity shares Regulations.

A recognized stock exchange may, by order, compulsorily delist any equitysharesof a company on grounds prescribed in the rules made under Section 21A of the Securities Contracts (Regulations) Act 1956. However, no order shall bemade unless the company concerned has been given a reasonable opportunity ofbeing heard.


Answer 8(vi)

Fixed Income Products

Fixed Income Products are investments vehicles which provide for fixedincome returns on investments. Fixed income products includes bank fixeddeposits, corporate Fixed deposits, Public Provident funds, Kisan Vikas Patra,National savings certificates etc. A bank basically has three types of deposits,i.e. time deposit, savings deposits and current account. NBFCs also acceptsvarious types of deposits.

Answer 8(vii)

Road shows in Euro Issues

Road shows represent meetings of issuers, analysts and potential investors.Details about the company are presented in the road shows and such detailsusually include the following information about the company making the issue:

• History; organizational structure

• Business lines

• Position of the company in Indian and international market

• Past performance of the company

• Future plans of the company

• Competition - domestic as well as foreign

• Financial results and operating performance

• Valuation of shares

• Review of Indian stock market and economic situations