1 EP–GCL– December 2009 EXECUTIVE PROGRAMME EXAMINATION DECEMBER 2009 GENERAL AND COMMERCIAL LAWS Time allowed : 3 hours Maximum marks : 100 NOTE : Answer SIX questions including Question No. 1 which is COMPULSORY. Question 1 (a) “The right of freedom of speech and expression under Article 19(1)(a) of the Constitution of India is not an absolute right but subject to reasonable restrictions.” Discuss. (8 marks) (b) What do you mean by double jeopardy ? (4 marks) (c) What do you mean by doctrine of waiver of rights under the Constitution of India ? (4 marks) (d) Discuss in brief the rule of colourable legislation. (4 marks) Answer 1(a) Article 19(1), clauses (a) to (e) and (g) of the Constitution guarantees to the citizens of India six freedoms which are exercisable by them throughout and in all parts of India. As per Article 19 (1), all citizens shall have the right - (a) to freedom of speech and expression; (b) to assemble peaceably and without arms; (c) to form associations or unions (d) to move freely, throughout the territory of India; (e) to reside and settle in any part of the territory of India; (f) (omitted) (g) to practise any profession, or to carry on any occupation, trade or business. These freedoms are not absolute but subject to reasonable restrictions. Accordingly, clauses (2) to (6) of Article19 recognize the right of the State to make laws imposing ‘reasonable restrictions’ on these freedoms in the interest of the general public, security of the State, public order, decency and morality, and for other reasons set out in these sub-clauses. Right to freedom of speech and expression It need not to be mentioned as to how important freedom of speech and expression in a democracy is. A democratic Government attaches great importance to this freedom because without freedom of speech and expression the appeal to reason which is the basis of democracy cannot be made. The freedom of speech and expression under Article 19(1)(a) means the right to express one’s convictions and opinions freely by word of mouth, writing, printing, pictures or any other mode.
1 EP–GCL–December 2009 2 The right to speech and expression includes right to make a good or bad speech and even the right of not to speak. One may express oneself even by signs. This freedom includes the freedom of press as it partakes of the same basic nature and characteristic (Maneka Gandhi v. Union of India, AIR 1978 S.C. 597). In Romesh Thapar v. State of Punjab, AIR 1950 S.C. 124, it was observed that “freedom of speech and of the press lay at the foundation of all democratic organisations, for without free political discussion no public education, so essential for the proper functioning of the process of popular Government is possible”. The Courts have held that this right includes right to publish one’s opinion, right to circulation and propagation of one’s ideas, freedom of peaceful demonstration, dramatic performance and cinematography. It may also include any other mode of expression of one’s ideas. The Supreme Court in Cricket Association of Bengal v. Ministry of Information & Broadcasting (Govt. of India), AIR 1995 SC 1236, has held that this freedom includes the right to communicate through any media - print, electronic and audio visual. As mentioned above, clause (2) of Article 19 specifies the limits upto which the freedom of speech and expression may be restricted. It enables the Legislature to impose by law reasonable restrictions on the freedom of speech and expression in the interests of : (1) The sovereignty and integrity of India; (2) The security of the State; (3) Friendly relations with foreign States; (4) Public Order; (5) Decency or morality; or (6) In relation to contempt of court; (7) Defamation or incitement to an offence. Reasonableness of the restriction is an ingredient common to all the clauses of Article 19. Reasonableness is an objective test to be applied by the judiciary. The following factors are usually considered to assess the reasonableness of a law: (i) The objective of the restriction; (ii) The nature, extent and urgency of the evil sought to be dealt with by the law in question; (iii) How far the restriction is proportion to the evil in question (iv) Duration of the restriction (v) The conditions prevailing at the time when the law was framed. The phrase ‘reasonable restrictions’ connotes that the limitation imposed upon a person in the enjoyment of a right should not be arbitrary or of an excessive nature. In determining the reasonableness of a statute, the Court would see both the nature of the restriction and procedure prescribed by the statute for enforcing the restriction on the individual freedom. The reasonableness of a restriction has to be determined in an objective manner and from the point of view of the interests of the general public and not from the point of view of the persons upon whom the restrictions are imposed or upon abstract considerations. The Court is called upon to ascertain the reasonableness of the restrictions and not of the law which permits the restriction. The word ‘restriction’ also includes cases of prohibition and the State can establish that a law, though purporting to deprive a person of his fundamental right, under certain circumstances amounts to a reasonable restriction only. 3 EP–GCL– December 2009 Answer 1(b) Double Jeopardy According to Article 20(2) of the Constitution of India no person can be prosecuted and punished for the same offence more than once. The ambit and content of the guarantee in Clause (2) of this article is however narrower than those of English or American doctrine. Article 20(2) operates as a bar to the second prosecution and punishment for the same offence whose ingredients are the same. There should be not only a prosecution but also a punishment in order to operate as a bar to not only a prosecution and punishment for the same offence. The words ‘prosecuted and punished’ are not to be read as ‘prosecuted’ or ‘punished’. Both the factors must co-exist in order that the operation of clause (2) may be affected. Article 20(2) of the Constitution of India states that no person can be prosecuted and punished for the same offence more than once. It is, however, to be noted that the conjunction “and” is used between the words prosecuted and punished and therefore, if a person has been let off after prosecution without being punished, he can be prosecuted again. Answer 1(c) The doctrine of waiver The doctrine of waiver of rights is based on the premise that a person is his best judge and that he has the liberty to waive the enjoyment of such rights as are conferred on him by the State. However, the person must have the knowledge of his rights and that the waiver should be voluntary. The doctrine was discussed in Basheshar Nath v. I.T. Commissioner, AIR 1959 SC 149, where the majority expressed its view against the waiver of fundamental rights. It was held that it was not open to citizens to waive any of the fundamental rights. Any person aggrieved by the consequence of the exercise of any discriminatory power, could be heard to complain against it. Answer 1(d) Rule of Colourable Legislation The Constitution does not allow any transgression of power by any legislature, either directly or indirectly. However, a legislature may pass a law in such a way that it gives it a colour of constitutionality while, in reality, that law aims at achieving something which the legislature could not do. Such legislation is called colourable piece of legislation and is invalid. To take an example in Kameshwar Singh v. State of Bihar, A.I.R. 1952 S.C. 252, the Bihar Land Reforms Act, 1950 provided that the unpaid rents by the tenants shall vest in the state and one half of them shall be paid back by the State to the landlord or zamindar as compensation for acquisition of unpaid rents. According to the provision in the State List under which the above law was passed, no property should be acquired without payment of compensation. The question was whether the taking of the whole unpaid rents and then returning half of them back to them who were entitled to claim, (i.e., the landlords) is a law which provides for compensation. The Supreme Court found that this was a colourable exercise of power of acquisition by the State legislature, because “the taking of the whole and returning a half means nothing more or less than taking of without any return and this is naked confiscation, no matter in whatever specious form it may be clothed or disguised”. EP–GCL–December 2009 4 The motive of the legislature is, however, irrelevant for the application of this doctrine. Therefore, if a legislature is authorised to do a particular thing directly or indirectly, then it is totally irrelevant as to with what motives — good or bad — it did that. Question 2 Explain any four of the following : (i) Rule of harmonious construction (ii) Proviso (iii) Rectification of an instrument (iv) International commercial arbitration (v) Valid acknowledgement and its effect on period of limitation. (4 marks each) Answer 2(i) Rule of Harmonious Construction Where in an enactment, there are two provisions which cannot be reconciled with each other, they should be so interpreted that, if possible, effect may be given to both. This is what is known as the “rule of harmonius construction”. A statute must be read as a whole and one provision of the Act should be construed with reference to other provisions in the same Act so as to make a consistent enactment of the whole statute. Such a construction has the merit of avoiding any inconsistency or repugnancy either within a section or between a section and other parts of the statute. It is the duty of the courts to avoid “a head on clash” between two sections of the same statute. The courts should construe provisions which appear to conflict in such a manner that they harmonise” (Raj Krishna v. Pinod Kanungo, A.I.R. 1954 S.C. 202 at 203). Answer 2(ii) Proviso When one finds a proviso to a section the natural presumption is that, but for the proviso, the enacting part of the section would have included the subject-matter of proviso. In the words of Lord Macmillan : "The proper function of a proviso is to except and to deal with the case which would otherwise fall within the general language of the main enactment and its effect is confined to the case". A distinction is said to exist between the provisions worded as 'proviso’, 'exception' or 'saving clause'. 'Exception' is intended to restrain the enacting clause to particular cases; 'proviso' is used to remove special cases from the general enactment and provide for them specially; and ‘saving clause’ is used to preserve from destruction certain rights, remedies or privileges already existing. As stated by Hidayatullah J : “ As a general rule , a proviso is added to an enactment to qualify or create an exception to what is in the enactment , and ordinarily, a proviso is not interpreted as stating a general rule”. Answer 2(iii) Rectification of Instruments Section 26 of the Specific Relief Act, 1963 deals with rectification of instruments. 5 EP–GCL– December 2009 Rectification means correction of an error in an instrument in order to give effect to the real intention of the parties. Where a contract reduced into writing in pursuance of previous agreement, fails to express real intention of the parties, the court will rectify instrument in accordance with their true intention. Here, there must be an existence as between the parties, a complete and perfectly unobjectionable contract; but the writing designed to embody it, either from fraud or mutual mistake is incorrect or imperfect and the relief sought is to rectify the writing so as to bring it into conformity with the true intention. In such a case, if such instrument is enforced one party will suffer and it is rescinded altogether both the parties will suffer but if it is rectified and enforced neither party will suffer .The principle on which the Courts act in correcting instruments is that parties are to be placed in the same position as that in which they would have stood if no error had been committed (Sudha Singh v. Munshi Ram, A.I.R 1927 Cal.605). There must have been a complete agreement prior to the instrument. It should be in writing and there must be clear evidence of mutual mistake or fraud.
Answer 2(iv)
International Commercial Arbitration
“International commercial arbitration” means an arbitration relating to disputes arising out of legal relationships, whether contractual or not considered as commercial under law in force in India and where at least one of the parties is:-
(i) An individual who is a national of, or habitual resident in, any country other than India ; or
(ii) A body corporate which is incorporated in any country other than India; or
(iii) A company or an association or a body of individuals whose central management and control is exercised in any country other than India; or
(iv) The Government of a foreign country [Section 2(1)(f).
Answer 2(v)
Valid acknowledgment and its effect on period of limitation
Section 18 of the Limitation Act, 1963 deals with the effect of the acknowledgement of liability in respect of property or right on the period of limitation. The following requirements should be present for a valid acknowledgement as per Section 18:
(a) There must be an admission or acknowledgement;
(b) Such acknowledgement must be in respect of any property or right;
(c) It must be made before the expiry of period of limitation; and
(d) It must be in writing and signed by the party against whom such property or right is claimed.
If all the above requirements are satisfied, a fresh period of limitation shall be computed from the time when the acknowledgement was signed. EP–GCL–December 2009 6 Question 3 Distinguish between any four of the following : (i) ‘Admission’ and ‘confession’. (ii) ‘Vested interest’ and ‘contingent interest’. (iii) ‘Mortgage’ and ‘charge’. (iv) ‘Review’ and ‘revision’ in civil law. (v) ‘Lease’ and ‘licence’. (4 marks each) Answer 3(i) Admission 1. An admission is a statement of fact, which waives or dispenses with the production of evidence by conceding that the fact asserted by the opponent is true. Admissions maybe oral or contained in documents. 2. An admission usually relates to a civil transaction and comprises all statements amounting to admissions. 3. An admission is not conclusive proof of matters admitted and the person admitting is deprived from taking a contradictory stand thereafter. 4. An admission may be used on behalf of the person making it under certain circumstances mentioned in Section 21 of the Evidence Act. Confession 1. The word confession has not been defined anywhere in the Indian Evidence Act, 1872. A confession is an admission made at any time by a person charged with a crime stating or suggesting the inference that he committed the crime. 2. The statement made by the accused person is sought to be proved against him in a criminal proceeding to establish the commission of an offence by him. 3. A confession if deliberately and voluntarily made may be accepted as conclusive in itself of the matters confessed. 4. A confession always goes against a person making it. Answer 3(ii) Vested interest 1. Vested interest does not depend upon the fulfillment of any condition. 2. In vested interested, there is present immediate right though its enjoyment may be postponed to some future date. 3. Vested interest is not defeated by the death of the transferee before he obtains possession. 4. Vested interested is both transferable as well as heritable. If the transferee of a vested interest dies, the interest passes on to his heirs. If the transferee of a vested interest dies, the interest passes on to his heirs. 7 EP–GCL– December 2009 Contingent Interest 1. Contingent interest depends upon the fulfillment of some condition precedent or on the happening of some event which may or may not happen. 2. In a contingent interest right of enjoyment is to accrue on the happening of an event which is uncertain. 3. Contingent interest does not take effect in the event of the transferee’s death before the fulfillment of the condition. 4. Contingent interest is not transferable. Whether it is heritable or not depends on the nature of the contingency. If the transferee of a contingent interest dies before obtaining possession, the interest fails and does not pass on to his heirs. Answer 3(iii) Mortgage 1. It is a transfer of an interest in specific immovable property made by a mortgagor as a security for the loan. 2. It is created by act of the parties. 3. It can be enforced against any transferee whether he takes it with or without notice of the mortgage. 4. In a mortgage by conditional sale or in an anomalous mortgage, the mortgagee can foreclose the mortgaged property. 5. In a mortgage, there can be security as well as personal liability. Charge 1. It does not involve transfer of any interest in the property although it serves as a security for the payment of the loan. 2. It may be created by act of the parties or by operation of law. 3. It cannot be enforced against bona fide transferee for consideration having no notice of charge. 4. A charge-holder cannot foreclose the property on which he has a charge. He can however get the property sold as a simple mortgage. 5. In a charge created by act of the parties when a particular property is specified, the remedy of the charge-holder is against the property only. Answer 3(iv) Review Any person considering himself aggrieved by the judgement of a Court may apply for a review of the judgement to the Court which passed the decree or made the order. The Court may make such order thereon as it thinks fit: (a) by decree or order from which an appeal is allowed by the Code, but from which no appeal has been preferred; or EP–GCL–December 2009 8 (b) by a decree or order from which no appeal is allowed by the Court, or (c) by a decision on a reference from a court of Small Causes. The grounds for application for the review of a judgement are mentioned in Rule 1 of Order 47. These grounds are as follows : (a) discovery by the applicant of new and important matter or evidence which after the exercise of due diligence was not within his knowledge or could not be produced by him at the time when the decree was passed or order made; or (b) some mistake or error apparent on the face of the record, or (c) any other sufficient reason. Revision The High Court may call for the record of any case which has been decided by any Court subordinate to such High Court and in which no appeal lies thereto. It may make such order in the case as it thinks fit if such subordinate Court appears: (a) to have exercised a jurisdiction not vested in it by law; or (b) to have failed to exercise a jurisdiction so vested; or (c) to have acted in the exercise of its jurisdiction illegally or with material irregularity. The High Court shall not, under Section 115, vary or reverse any order made, or any order deciding an issue, in the course of a suit or other proceeding, except where: (a) the order, if it had been made in favour of the party applying for revision, would have finally disposed of the suit or other proceedings; or (b) the order, if allowed to stand, would occasion a failure of justice or cause irreparable injury to the party against whom it was made. Further, the High Court shall not, under Section 115, vary or reverse any decree or order against which an appeal lies either to the High Court or to any Court subordinate thereto. In Section 115, the expression ‘any case which has been decided, includes any order made, or any order deciding an issue in the course of a suit or other proceeding. Answer 3(v) Lease 1. There is a transfer of an interest in the immovable property. 2. A lessee gets the exclusive possession of the property. 3. It creates an heritable estate. 4. It can be assigned or transferred. 5. It cannot be revoked. 6. It can be terminated in any of the ways provided by law. 9 EP–GCL– December 2009 Licence 1. There is no transfer of interest. 2. A licencee gets the right to use the property without exclusive possession. 3. It does not create an heritable estate. 4. It cannot be assigned as it is a personal right. A licencee, therefore, has no transferable interest in the licence. 5. It is ordinarily revocable. 6. It is terminated by death of either party, or by the alienation of property in question. Question 4 (a) Discuss briefly the doctrine of part-performance embodied in section 53A of the Transfer of Property Act, 1882. (6 marks) (b) Discuss the doctrine of res judicata under section 11 of the Code of Civil Procedure, 1908. (5 marks) (c) Discuss the powers of various courts under the Code of Criminal Procedure, 1973. (5 marks) Answer 4(a) Doctrine of part-performance : Section 53-A of the Transfer of Property Act, 1882 deals with the doctrine of part-performance. Operation of the doctrine of part-performance, according to Section 53A, depends on following conditions : (i) There must be a contract to transfer immovable property. (ii) It must be for consideration (iii) The contract should be in writing and signed by the transferor himself or on his behalf. (iv) The terms necessary to constitute the transfer must be ascertainable with reasonable certainty from the contract itself. (v) The transferee should have taken the possession of property in part performance of the contract. In case he is already in possession, he must have continued in possession and must have done something in furtherance of the contract.
(vi) The transferee must have fulfilled or ready to fulfill his part of the obligation under the contract.
If all above conditions are satisfied, then the transferor and the person claiming under him are debarred from exercising any right in relation to the property other than the rights expressly provided by the terms of the contract notwithstanding the fact that the instrument of transfer has not been registered or complete in the manner prescribed therefor by the law for time being in force. However, the doctrine of part performance cannot affect the rights, of a transferee for consideration who has no notice of the contract or of the part-performance thereof. It should be noted that Section 53A does not confer EP–GCL–December 2009 10 any positive right on the transferee. It only prohibits exercise of the right of ownership in relation to the property in order to evict the transferee from the property because legal requirements have not been satisfied. Answer 4(b) Doctrine of Res-judicata : Section 11 of the Civil Procedure Code,1908 deals with the doctrine of res judicata that is bar or restraint on repetition of litigation of the same issues. General principle is that no one shall be twice vexed for the same cause. For the applicability of the principle of res judicata embodied in Section 11, the following requirements are necessary: (i) The matter directly and substantially in issue in former suit shall also be directly and substantially in issue in later suit. (ii) The former suit has been decided—former suit means which is decided earlier. (iii) The said issue has been heard and finally decided. (iv) Such former suit and the latter are between the same parties or litigation under the same title or persons claiming under parties above. (v) The Court which determined the earlier suit must be competent to try the latter suit. (vi) Any matter which might or ought to have been made a ground of defence or attack in such a former suit shall be deemed to have been a matter directly in issue in such suit. (vii) Relief claimed in the plaint but not expressly granted shall be deemed to have been refused. Answer 4(c) Following are different classes of Criminal Courts under the Cr.P.C., 1973 and their powers : (i) High Courts : High Court may pass any sentence authorized by Law. (ii) Courts of Session : A Session Judge or Additional Sessions Judge can pass any sentence authorized by law, but any sentence of death passed by any such judge shall be subject to confirmation by the High Court. An Assistant Sessions Judge may pass any sentence authorized by law except a sentence of death or of imprisonment for life or imprisonment for a term exceeding ten years, (iii) The Court of Chief Judicial Magistrate or Additional Chief Judicial Magistrate may pass any sentence authorized by law except a sentence of death or of imprisonment for life or of imprisonment for a term exceeding 7 years. (iv) A Magistrate of the first class may pass a sentence of imprisonment for a term not exceeding three years or of a fine not exceeding Rs.5,000 or of both. (v) A Magistrate of the second class may pass a sentence of imprisonment for a term not exceeding one year, or of fine not exceeding Rs.1,000 or of both. 11 EP–GCL– December 2009 (vi) A Chief Metropolitan Magistrate shall have the powers of the Court of a Chief Judicial Magistrate and that of a Metropolitan Magistrate and the powers of the Court of a Magistrate of the First Class. Question 5 (a) Re-write the following sentences after filling-in the blank spaces with appropriate word(s)/figure(s) : (i) Any person aggrieved by an order of Controller of Certifying Authorities or of the Adjudicator can appeal to the Cyber Regulations Appellate Tribunal within ______days. (ii) The period of limitation for instituting a summary suit is ______from the date on which the debt becomes due. (iii) Limitation of taking cognizance is ______, if the offence is punishable with fine only. (iv) Adjudicating authority under section 43 of the Information Technology Act, 2000 can impose damages by way of compensation an amount not exceeding Rs.______. (v) Only the principal instrument shall be chargeable under section 4 of the Indian Stamp Act, 1899 with the duty prescribed for the conveyance, mortgage or settlement and each of other instruments shall be chargeable with the duty of Rs.______. (vi) If there is any appearance of inconsistency between the Schedule and a specific provision in an enactment, the ______shall prevail. (1 mark each) (b) Choose the most appropriate answer from the given options in respect of the following : (i) In which of the following case, the Supreme Court made it clear that Parliament cannot alter the basic structure of the Constitution of India –– (a) I.C. Golak Nath vs. State of Punjab (b) Kesavananda Bharati vs. State of Kerala (c) Shankari Prasad vs. Union of India (d) Indira Gandhi vs. Raj Narain. (ii) Doctrine of sufficient cause under section 5 of the Limitation Act, 1963 will apply on — (a) Suits (b) Appeals and applications (c) Both (a) and (b) (d) None of the above. (iii) Right to information is derived from the constitutional right, i.e.,— (a) Right of freedom of speech and expression EP–GCL–December 2009 12 (b) Right to liberty (c) Right of trade and commerce (d) Right to equality. (iv) Who may pass any sentence authorised by law — (a) District Magistrate (b) Chief Judicial Magistrate (c) Sessions Judge (d) Magistrate of the First Class. (v) Public Information Officer for failing to provide information will be liable for fine of Rs.250 per day upto a maximum of — (a) Rs. 25,000 (b) Rs. 50,000 (c) Rs.75,000 (d) Rs. 1,00,000. (vi) Any person aggrieved by any decision or order of the Cyber Regulations Appellate Tribunal may appeal to the — (a) Civil Judge (b) District Judge (c) District Magistrate (d) High Court. (1 mark each) (c) Explain either of the following : (i) Doctrine of marshalling (ii) Circumstantial evidence. (4 marks)
Answer 5(a)
(i) Any person aggrieved by an order of Controller of Certifying Authorities or of the Adjudicator can appeal to the Cyber Regulations Appellate Tribunal within 45 days.
(ii) The period of limitation for instituting a summary suit is one year from the date on which the debt becomes due. (iii) Limitation of taking cognizance is six months, if the offence is punishable with fine only. (iv) Adjudicating authority under section 43 of the Information Technology Act, 2000 can impose damages by way of compensation an amount not exceeding Rs. one crore. (v) Only the principal instrument shall be chargeable under section 4 of the Indian Stamp Act, 1899 with the duty prescribed for the conveyance, mortgage or settlement and each of other instruments shall be chargeable with the duty of Rupee One. 13 EP–GCL– December 2009 (vi) If there is any appearance of inconsistency between the Schedule and a specific provision in an enactment, the enactment shall prevail. Answer 5(b)(i) (b) Kesavananda Bharati v. State of Kerala Answer 5(b)(ii) (b) Appeals and applications Answer 5(b)(iii) (a) Right to freedom of speech and expression Answer 5(b)(iv) (c) Sessions Judge Answer 5(b)(v) (a) Rs. 25,000 Answer 5(b)(vi) (d) High Court. Answer 5(c)(i) Doctrine of marshalling According to Section 81 of the Transfer of Property Act, 1882 if the owner of two or more properties mortgages them to one person and then mortgages one or more of the properties to another person, the subsequent mortgagee is, in the absence of a contract to the contrary, entitled to have the prior mortgage-debt satisfied out of the property or properties not mortgaged to him, so far as the same will extend, but not so as to prejudice the rights of the prior mortgagee. This is known as the doctrine of marshalling. Answer 5(c)(ii) Circumstantial evidence In English law the expression direct evidence is used to signify evidence relating to the ‘fact in issue’ (factum probandum) whereas the terms circumstantial evidence, presumptive evidence and indirect evidence are used to signify evidence which relates only to “relevant fact” (facta probandum). However, under Section 60 of the Evidence Act, 1872 the expression “direct evidence” has altogether a different meaning and it is not intended to exclude circumstantial evidence of things which could be seen, heard or felt. Thus, evidence whether direct or circumstantial under English law is “direct” evidence under Section 60. Before acting on circumstances put forward are satisfactorily proved and whether the proved circumstances are sufficient to bring the guilt of the accused the Court should not view in isolation the circumstantial evidence but it must take an overall view of the matter. Question 6 (a) Ragini, a singer agreed to sing at Lakshmi’s theatre from January to April, 2009 and not to sing anywhere else during that period. Afterwards, she entered into a EP–GCL–December 2009 14 contract to sing at Kamala’s theatre during the said period and refused to sing at Lakshmi’s theatre during that period. Lakshmi filed an injunction application to appropriate court. What relief Lakshmi is entitled to get, and for which part court may refuse to grant injunction ? Decide giving reasons. (6 marks) (b) Government of Madhya Pradesh passed a law prohibiting the manufacture of bidis in the villages during the agricultural season. No person residing in the village could employ any other person nor engage himself in the manufacture of bidis during the agricultural season. The objective of the provision was to ensure adequate supply of labour for agricultural purposes. A bidi manufacturer could not even engage labour from outside the State, and so, had to suspend manufacture of bidis during the agricultural season. Even villagers incapable of engaging in agriculture, like old persons, women and children, etc., who supplemented their income by engaging themselves in manufacturing bidis were prohibited without any reason. Decide whether law passed by Government of Madhya Pradesh is constitutionally valid. (5 marks) (c) A suit was instituted by the plaintiff company alleging infringement by the defendant company for using trade name of medicine and selling the same in wrapper and carton of identical designs with same colour combination, etc., as that of plaintiff company. A subsequent suit was instituted in a different court by the defendant company against the plaintiff company with similar allegations. In such a situation, advise the plaintiff company the procedure adopted by the courts. (5 marks) Answer 6(a) Section 42 of the Specific Relief Act, 1963 provides that notwithstanding anything contained in clause (e) of section 41, where a contract comprises an affirmative agreement to do a certain act, coupled with a negative agreement, express or implied, not to do a certain act, the circumstance that the court is unable to compel specific performance of the affirmative agreement shall not preclude it from granting an injunction to perform the negative agreement, provided that the plaintiff has not failed to perform the contract so far as it is binding on him. The given problem is based on an English case namely Lumley v. Wagner (21) LJCH 898. In this case Miss W, a singer agreed to sing at L’s theatre for a certain period and not to sing anywhere else during that period. Afterwards, she entered into a contract to sing at another theatre and refused to perform her contract with L. The Court refused to enforce her positive agreement to sing at L’s theatre (by specific performance) but granted an injunction restraining her from singing at any other theatre thereby preventing breach of the negative part of the agreement though the positive part of it, being a contract for the personal service, could not be specifically enforced. Answer 6(b) The facts of the problem are based on the leading Supreme Court case namely Chintamana Rao v. State of M.P., AIR 1951 SC 118 where constitutionality of Madhya Pradesh Act which empowered the government to prohibit all persons residing in certain areas from engaging in manufacture of bidis was challenged. In this case the prohibition was held to be unreasonable because it was of excessive nature beyond what is required in the interest of public. 15 EP–GCL– December 2009 The prohibition infringed the fundamental right guaranteed under Article 19(1)(g) of the Constitution which provides that all citizens shall have the right to practice any profession or to carry any occupation, trade or business. At the same time, the freedom guaranteed under Article 19(1)(g) is not uncontrolled, for, clause (6) of the Article authorises legislation which (i) imposes reasonable restrictions on this freedom in the interests of the general public; (ii) prescribes professional or technical qualifications necessary for carrying on any profession, trade or business; and (iii) enables the State to carry on any trade or business to the exclusion of private citizens, wholly or partially. The emphasis of the courts has been on social control and social policy. The vital principle which has to kept in mind is that the restrictive law should strike a proper balance between the freedom guaranteed under Article 19(1)(g) and the social control permitted by clause (6) of Article 19. The restriction must not be of an excessive nature beyond what is required in the interests of the public. Answer 6(c) The problem is based on the case M/s Wings Pharmaceuticals (P) Ltd,. and another v. M/s Swan Pharmaceuticals and Others A.I.R. (1999) Pat. 96. Section 10 of C.P.C. dealing with stay of suits contains provisions that the institution of second suit between the same parties on same fact and issues is not barred by Section 10. It merely says that the trial in subsequent suit cannot be proceeded with. The Court held that subsequent suit should be stayed as simultaneous trial of the suits in different courts might result in conflicting decisions as the issue involved in two suits was totally identical.
Question 7
(a) Four adhesive stamps were used on an instrument. First adhesive stamp had a single line drawn across the face of the stamp. On the second stamp, there were two parallel lines. The third stamp had three parallel lines, and the fourth stamp had two lines crossing each other. What are the provisions for cancellation of adhesive stamps and which adhesive stamps referred to above will be considered to have been properly cancelled ? (6 marks) (b) Anil has two properties – Property-X and Property-Y. He sells Property-Y to Sunil and puts a condition that Sunil should not construct on Property-Y more than one storey so that Anil’s Property-X which he retains should have good light and free air. Is such a condition valid ? Give reasons in support of your answer. (5 marks) (c) Ajay, a Hindu, who was separated from his father, sells to Chander three fields A, B and C representing that he is authorised to transfer the same. Of these fields, Field-C does not belong to Ajay, as it was retained by his father at the time of partition, but after his father’s death Ajay being the heir obtained Field-C. Chander did not rescind the contract of sale and asked Ajay to deliver Field-C to him. Whether Chander will succeed ? Decide. (5 marks) Answer 7(a) Section 12(3) of the Indian Stamp Act, 1899 dealing with the mode of cancellation of stamps provides that the cancellation of an adhesive stamp may be done by the person EP–GCL–December 2009 16 concerned by writing on or across the stamp his name or initials, or the name or initials of his firm with the true date of his so writing, or in any other effectual manner. Sub-section (3) merely lays down as a guidance one of the ways in which an adhesive stamp can be cancelled. The problem is based on the facts of the case in re Tata Iron Steel Company, AIR 1928 Bombay 80. In this case it was held that all the four stamps must be regarded as having being cancelled in the manner so that they cannot be used again. Answer 7(b) Section 11 of Transfer of Property Act, 1882 embodies a rule which is based on the principle that restraint on the enjoyment of the property is invalid. This section lays down that where land is transferred by one to another, the transferor should not impose conditions as to how and in what manner the transferee should enjoy the property. The given problem is an illustration appended to Section 11 of Transfer of Property Act. It is clear in the problem that the condition which is imposed by Anil is for the benefit of another property which he retains. Such a condition is valid. Answer 7(c) The given problem is an illustration appended to Section 43 of Transfer of Property Act, 1882. Section 43 of Transfer of Property Act lays down the doctrine of feeding the grant by estoppel. As per this doctrine where a person fraudulently or erroneously represents that he is authorized to transfer certain immovable property or proposes to transfer such property for consideration, such transfer shall, at the option of transferee operate on any interest which the transferor may acquire in such property at any time during which the contract of transfer subsists. Thus, where a grantor has purported to grant an interest in land which he did not at that time possess, but subsequently acquires, the benefit of his subsequent acquisition goes automatically to the earlier grantee or as it usually expressed, feeds the estoppel. Question 8 (a) The managing clerk of a firm of solicitors, while acting in the ordinary course of business committed fraud, against a lady client by fraudulently inducing her to sign a document transferring her property to him. He had done so without the knowledge of his principal. Whether principal will be liable ? Give reasons. (6 marks) (b) Aamir effects an insurance policy on his own life with the Life Insurance Corporation of India (LIC) and deposits it with a bank for securing payment of an existing debt. Aamir dies and bank claims the amount from the LIC contrary to the claims of Aamir’s heirs. Decide whether the claim of the bank is maintainable. (5 marks) (c) Gautam executed a document on 20th October, 2007 in favour of Thomas. Thereafter, Gautam executed another document on 1st December, 2007 in favour of Peter in respect of the same property. The document between Gautam and Thomas was registered on 15th January, 2008 whereas the document between 17 EP–GCL– December 2009 Gautam and Peter was registered on 15th December, 2007. Which document gets priority and why ? (5 marks) Answer 8(a) Normally, the tort feasor is liable for his tort. But in some cases a person may be held liable for the tort committed by another. A master is liable for the tort of his servant, principal for the tort of his agent and partners for the tort of a partner. This principle is called vicarious liability in tort. In this case principal is liable because the fraud was committed by the managing clerk of the firm of solicitors in the course of employment. The given problem is based on the case Llyod v. Grace Smith & Company (1912) AC 716. Answer 8(b) Actionable claims can be transferred by the execution of an instrument in writing signed by the transferor or his duly authorized agent. (Section 130 to 137 of Transfer of Property Act, 1882). In this case the amount due under a policy of insurance is an actionable claim. The assignment of an actionable claim should be made in writing by the transferor. The deposit of the policy by the transferor as security without written document in favour of the bank is not a valid assignment. The bank cannot have any claim as against the heirs of Aamir. Answer 8(c) Section 47 of the Registration Act 1908 provides that a registered document shall operate from the time from which it would have commenced to operate if no registration thereof had been required or made and not from the time of its registration. In K. J. Nathan v. S. V. Maruthi Rai, AIR 1965 SC 430, the Supreme Court has laid down that as between two registered documents, the date of execution determines the priority. Of the two registered documents, executed by same persons in respect of the same property to two different persons at two different times, the one which is executed first gets priority over the other, although the former deed is registered subsequently to the later one. As is evident, the date of the f execution of the document is material and not the date registration, and the document executed first gets priority over the other. In this case document executed on 20.10.2007 between Mr. Gautam and Mr. Thomas will get priority because it is executed prior to 1.12.2007. COMPANY ACCOUNTS, COST AND MANAGEMENT ACCOUNTING
Time allowed : 3 hours Maximum marks : 100 NOTE: All working notes should be shown distinctly. PART—A Question 1 (a) State, with reasons in brief, whether the following statements are correct or incorrect : (i) Accounting policies vary from enterprise to enterprise. (ii) In the absence of declaration of dividend, there is no need to provide for depreciation in the accounts of companies. (iii) Securities premium money can be distributed as dividend. (iv) For calculating minority interest, there is a need to distinguish between capital and revenue profits of the subsidiary. (v) While preparing the consolidated balance sheet, a contingent liability in respect of a transaction between the holding and the subsidiary companies is disappeared from the foot note. (2 marks each) (b) Choose the most appropriate answer from the given options in respect of the following : (i) Indian accounting standards are formulated under the authority of the — (a) Council of the Institute of Chartered Accountants of India (b) National Advisory Committee on Accounting Standards (c) International Accounting Standard Board (d) Accounting Standard Board. (ii) As per section 79 of the Companies Act, 1956 from the date of receiving the sanction of the Central Government, a company must issue shares at discount within a period of — (a) One month (b) Two months (c) Three months (d) Six months. (iii) As per section 387 of the Companies Act, 1956, total remuneration to manager should not exceed the rate of net profit of the company except with approval of the Central Government — (a) 5% (b) 2% (c) 11% (d) 10%.
17 EP-CACMA-June 2010 18
(iv) Profit on cancellation of own debentures should be transferred to — (a) Profit and loss account (b) Profit and loss appropriation account (c) Capital reserve account (d) Reserve capital account. (v) Profit prior to incorporation is transferred to — (a) General reserve (b) Capital reserve (c) Goodwill account (d) Profit and loss account. (1 mark each) (c) Re-write the following sentences after filling-in the blank spaces with appropriate word(s)/figure(s) : (i) Goodwill is ______asset. (ii) Preliminary expenses being of capital nature may be written-off against ______. (iii) Collateral security implies ______security given for a loan. (iv) Interim dividend is a dividend declared at any time between the ______where the final dividend is declared. (v) Stock reserve for unrealised profit in respect of inter-company transactions should be created by debiting ______and crediting ______while preparing consolidated profit and loss account. (1 mark each) Answer 1(a) (i) Correct: Accounting policies vary from enterprise to enterprise based on the circumstances/practices of the industry. Accounting policies refer to the specific accounting principles and the methods of applying those principles adopted by the enterprise in the preparation and presentation of financial statements. Variations may be in the following areas, such as – method of depreciation, depletion; valuation of inventories; valuation of investments; expenditure during construction, etc. (ii) Incorrect: Depreciation represents wear and tear of assets due to constant use. Unless depreciation is provided for, the accounts will not reflect a “true and fair” view of the state of affairs of the company. Further, capital will not be kept intact, unless the depreciation is charged. Hence, even if no dividend is declared, depreciation is to be provided for in the accounts of companies. (iii) Incorrect: Under Section 78 of the Companies Act, 1956, it is stated that securities premium may be utilized in paying up unissued shares as bonus shares, writing off preliminary expenses, writing off expenses or commission or discount on issue of shares/debentures and providing for premium on redemption of redeemable preference shares/debentures. The balance in securities premium account will appear under the head Reserve and Surplus 19 EP-CACMA-June 2010
in the balance sheet. Securities premium money is not be used for distribution as dividend. (iv) Incorrect: Minority shareholders are concerned with their stake in the holding company. Their rights consist in share capital and reserve and surplus. In order to ascertain minority interests, capital profit and revenue profit need not be distinguished. (v) Correct: If the contingent liabilities relate to outsiders, it must be shown by way a foot note in the consolidated balance sheet. But a contingent liability in respect of a transaction between holding and subsidiary companies (internal contingent liability) will disappear from the foot note as they appear as actual liability in the consolidated balance sheet. Answer 1(b) (i) (a) - Council of the Institute of Chartered Accountants of India. (ii) (b) - Two months (iii) (a) - 5% (iv) (c) - Capital reserve account (v) (b) - Capital reserve Answer 1(c) (i) Goodwill is intangible asset. (ii) Preliminary expenses being of capital nature may be written-off against capital profit. (iii) Collateral security implies additional security given for a loan. (iv) Interim dividend is a dividend declared at any time between the two annual general meetings where the final dividend is declared. (v) Stock reserve for unrealised profit in respect of inter-company transactions should be created by debiting Consolidated Profit and Loss Account and crediting Stock Reserve Account [(or) debiting Revenue Profit and crediting Stock Account] while preparing consolidated profit and loss account. Question 2 (a) Write short notes on any two of the following : (i) Non-acceptability of International Accounting Standards (ii) Capitalisation of profits and reserves (iii) Phases of generation of intangible assets. (3 marks each) (b) Following are balance sheets of H Ltd. and S Ltd. as at 31st March, 2009: Liabilities H Ltd. S Ltd (Rs.). (Rs.) Share capital (Shares of Rs.100 each) 5,00,000 2,00,000 EP-CACMA-June 2010 20
General reserve as on 1st April, 2008 1,00,000 60,000 Profit and loss account 1,40,000 90,000 Bills payable –– 40,000 Creditors 80,000 50,000 8,20,000 4,40,000
Assets Goodwill 40,000 30,000 Other fixed assets 3,60,000 2,20,000 1,500 Shares in S Ltd. at cost 2,40,000 –– Stock 1,00,000 90,000 Debtors 20,000 75,000 Cash at bank 60,000 25,000 8,20,000 4,40,000 The profit and loss account of S Ltd. showed a balance of Rs.50,000 on 1st April, 2008. A dividend of 15% was paid on 15th October, 2008 for the year 2007-08. The dividend was credited by H Ltd. to its profit and loss account. H Ltd. acquired shares on 1st October, 2008. The bills payable of S Ltd. were all issued in favour of H Ltd. and the same were got discounted by H Ltd. Included in the creditors of S Ltd. are Rs.20,000 for goods supplied by H Ltd. The stock of S Ltd. includes goods to the value of Rs.8,000 which were supplied by H Ltd. at a profit of 33.33% on cost. Prepare consolidated balance sheet of H Ltd. and S Ltd. as on 31st March, 2009. (9 marks) Answer 2(a) (i) Non-acceptability of International Accounting Standards Accounting practices in different countries vary due to divergent legislative requirements, social and economic conditions, long standing practices, tax structure and organized professional accounting. Often, multinational companies have a different viewpoint than national companies. Worldwide conflicts of views have been noticed in the national standards setting bodies and international bodies. There is a glaring diversity in accounting practices in different countries which require harmonization for evolving uniform accounting standards for world wide application. Western countries have comparatively greater access to international standards setting agencies. These factors are the primary reason for non acceptability of international Accounting Standards throughout the world. However, in the present era of globalization and liberalization, the world has become a global village. A number of multinational companies have established their business in emerging economies. This has resulted in adoption or convergence of International Accounting Standards or International Financial Reporting Standards by national standards setting bodies. (ii) Capitalisation of profits and reserves When a company accumulates huge reserves out of its profits which is much in excess of the needs of the company, the excess amount can be distributed by way of 21 EP-CACMA-June 2010 bonus shares among the existing shareholders of the company. Thus, the accumulated profits and reserves of the company are converted into its share capital which is permanently used in the business. This process is also known as “capitalisation of profits and reserves”. Capitalisation of accumulated profits and reserves of a company is possible only if the Articles of the company contain such provision. The basic characteristics of bonus shares are the following: (1) Bonus shares are issued to the existing shareholders. (2) Bonus shares are always fully paid up. (3) Right to renunciation is not available in respect of bonus shares. Bonus shares can be issued out of the following: (i) Balance in the Profit and Loss Account; (ii) General Reserves or other Reserves created out of the profits; (iii) Realised capital profits and reserves; (iv) Securities Premium Account; (v) Capital Redemption Reserve Account.
(iii) Phases of generation of intangible assets
Internally generated goodwill should not be recognized as an Intangible Asset. An enterprise classifies the generation of Intangible assets into – (a) a research phase; (b) a development phase.
Research Phase – No intangible asset arising from the research (or from the research phase of an internal project) should be recognized. Expenditure on research (or on the research phase of an internal project) should be recognized as an expenses when it is incurred.
Development Phase – An intangible asset arising from development (or from the development phase of an internal project) should be recognized if, and only if, an enterprise can demonstrate all of the followings : (a) The technical feasibility of completing the intangible assets so that it will be available for use or sale. (b) Its Intention to complete the intangible assets and use or sell it. (c) Its ability to use or sell the intangible asset. (d) How the intangible assets will generate probable future economic benefits. (e) The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible assets. (f) Its ability to measure the expenditure attributable to the intangible assets during its development reliably. EP-CACMA-June 2010 22
Answer 2(b) Consolidated Balance Sheet of H Ltd. and S Ltd. as on March 31, 2009 Liabilities Rs. Rs. Assets Rs. Rs. Share Capital: Fixed Assets: 5,000 Shares of Goodwill 70,000 Rs.100 each 5,00,000 Less: Capital Minority Interest 87,500 Reserve 18,750 51,250 General Reserve 1,00,000 Profit & Loss A/c 1,40,000 Other Fixed Add: Post Assets: acquisition profit 26,250 H Ltd. 3,60,000 1,66,250 S Ltd. 2,20,000 5,80,000 Less: Pre- Cash at Bank 85,000 acquisition Sundry Debtors 75,000 Dividend 22,500 (Rs. 20,000 + Unrealised Profit 2,000 1,41,750 Rs. 75,000 – Rs. 20,000) Bills Payable 40,000 Stock Sundry Creditors : H Ltd. 1,00,000 H Ltd. 80,000 S Ltd. 90,000 S Ltd. 50,000 1,90,000 1,30,000 Less: Less: Common 20,000 Unrealised 2,000 debts 1,10,000 Profit 1,88,000 9,79,250 9,79,250
Working Note: (i) S Ltd.’s Profit and Loss Account Particulars Rs. Particulars Rs. To Dividend for 2007-08 By Balance b/d 50,000 @ 15% on Rs.2,00,000 30,000 By Net profit for the year To Balance c/d 90,000 (balancing figure) 70,000 1,20,000 1,20,000 Net profit for the year ended 31st March, 2009 = Rs.70,000 Net profit for six months, i.e., Post-acquisition Profits = Rs.70,000 x 6/12 = Rs.35,000 H Ltd.’s share = 75% of Rs.35,000 = Rs.26,250 (ii) Capital Profits: Rs. General reserve as on 1st April, 2008 60,000 Add: Balance of profit and loss account as on 1st April, 2008 50,000 Half of net profit for the year 2008-2009 35,000 23 EP-CACMA-June 2010
1,45,000 Less: Dividend on equity share @15% 30,000 Capital profit 1,15,000 H Ltd.’s share = 75% of Rs.1,15,000 = Rs.86,250 (iii) Capital reserves on consolidation: Paid up value of shares acquired 1,50,000 H Ltd.’s share of capital profits 86,250 Dividend received out of pre-acquisition profits 22,500 2,58,750 Less: Amount paid 2,40,000 Capital Reserve 18,750 (iv) Minority Interest: Paid-up value of 500 shares in S Ltd. 50,000 25% of S Ltd.’s General reserve 15,000 25% of S Ltd.’s Profit and Loss Account 22,500 87,500 Question 3 The following balances have been extracted from the books of Pioneer Traders Ltd. as on 30th September, 2009 :
(Rs. ’000) Dr. Cr. Share capital (Authorised and issued): Equity (15,00,000 Shares of Rs.100 each) –– 1,50,000 8% Redeemable preference (40,000 shares) –– 4,000 Securities premium –– 2,500 Preference share redemption 4,800 –– General reserve –– 10,000 Land (cost) 30,000 –– Buildings (cost less depreciation) 70,000 –– Furniture (cost less depreciation) 2,000 –– Motor vehicle (cost less depreciation) 3,500 –– Trading account – gross profit –– 90,000 Establishment charges 25,000 –– Rate, taxes and insurance 1,200 –– Commission 600 –– Discount received –– 500 Interest on investments –– 800 Depreciation 6,000 –– Sundry office expenses 6,000 –– Payment to auditors 400 –– Sundry debtors and creditors 10,660 2,560 Profit and loss account (as on 30.9.2008) –– 1,000 EP-CACMA-June 2010 24
Unpaid dividend –– 200 Cash in hand 1,200 –– Cash at bank in current account 19,500 –– Security deposit 1,000 –– Outstanding expenses –– 600 Investments in G.P. Notes 20,000 –– Stock in trade (at or below cost) 35,300 –– Provision for taxation (year ended 30.9.2008) — 7,000 Income-tax paid under dispute (year ended 30.9.2008) 10,000 — Advance payment of income-tax 22,000 — 2,69,160 2,69,160
The following further details are available : (i) The preference shares were redeemed on 1st October, 2008 at a premium of 20% but no entries were passed for giving effect thereto, except payment standing to the debit of preference share redemption account. (ii) Depreciation as provided upto 30th September, 2009 is as follows : (a) Building – Rs.2,10,00,000. (b) Furniture – Rs.20,00,000. (c) Motor vehicles – Rs.60,00,000. (iii) Establishment charges include Rs.18,00,000 paid to managing director as remuneration in terms of agreement which provides for a remuneration of 5% of annual net profits. (iv) Payment to auditors includes Rs.1,00,000 for taxation work in addition to audit fees. (v) Market value of investments on 30th September, 2009 is Rs.1,80,00,000. (vi) Sundry debtors include Rs.40,00,000 due for a period exceeding six months. (vii) All receivables and deposits are considered good for realisation. (viii) Income-tax demand for the year ended 30th September, 2008 Rs.1,00,00,000 has not been provided for against which appeal is pending. (ix) Income-tax is to be provided @ 34%. Also provide for tax on divisible profit @ 16%. (x) Directors recommended payment of dividend on equity shares at the rate of 12%. (xi) Ignore previous year’s figures. You are required to prepare the profit and loss account for the year ended 30th September, 2009 and a balance sheet as at that date. (15 marks) 25 EP-CACMA-June 2010
Answer 3 Profit and Loss Account of Pioneer Traders Ltd. for the year ended 30th September, 2007 (Rs. in 000’s) Dr. Cr.
Particulars Rs. Rs. Particulars Rs.
To Establishment By Gross profit b/d 90,000 Charges 25,000 By Discount received 500 Less: Remu- By Interest on Investment 800 neration to M.D. 1,800 23,200 To Rates, taxes and insurance 1,200 To Commission 600 To Depreciation 6,000 To Sundry office expenses 6,000 To Payment to auditors: Audit fees 300 Fees for taxation work 100 400 To Remuneration to managing director @5% on Profits Rs.53,900 (i.e. Rs.91,300 – Rs.37,400) 2,695 To Provision for taxation 17,410 To Net Profit c/d 33,795 ______91,300 91,300
To Provision for By Balance as per last year 1,000 taxation for the By Profit for the year b/d 33,795 year ended 30.9.2008 3,000 To General reserve 845 (2.5% of current year’s profit) To Proposed dividend @ 12% on paid-up capital 18,000 To Tax on Distributed Profit @ 16% 2,880 To Balance c/d 10,070 ______34,795 34,795
EP-CACMA-June 2010 26
Balance Sheet of Pioneer Traders Ltd., as at 30th September, 2009 (Rs. in 000’s)
Liabilities Rs. Assets Rs.
Share Capital: Fixed Assets: Authorised Capital - Land at Cost 30,000 15,00,000 Equity Shares Building at Cost 91,000 of Rs. 100 each 1,50,000 Less: Depre- Issued and Subscribed ciation to date 21,000 70,000 Capital - 15,00,000 Equity Shares of Furniture 4,000 Rs. 100 each, fully paid-up 1,50,000 Less: Depre- Reserves and Surplus: ciation to date 2,000 2,000 Capital Redemption Reserve Account 4,000 Motor Vehicles 9,500 Securities Premium Account 1,700 Less: Depre- General Reserve as ciation to date 6,000 3,500 per last year’s Balance Sheet 10,000 Investments: Less: Transfer to Investments in G.P. Capital Redemption Note (market value Reserve 4,000 Rs. 18,000 thousand) 20,000 6,000 Current Assets, Added during Loans and Advances: the year 845 6,845 A. Current Assets: Profit and Loss Account 10,070 Stock-in-trade Secured Loan: — (at or below cost) 35,300 Unsecured Loan: — Sundry Debtors: Current Liabilities and Debts Outstanding Provisions: For more than A. Current Liabilities: 6 months 4,000 Sundry creditors 2,560 Other debts 6,660 10,660 Unpaid dividend 200 Cash in hand 1,200 Outstanding expenses 600 Bank balance in Remuneration payable to Current Account 19,500 Managing Director: B. Loans and Advances: Remuneration @ 5% on Security deposit 1,000 Net profit 2,695 Income-tax paid Less: Amount Under dispute 10,000 already paid 1,800 895 Advance payment of tax 22,000 B. Provisions Provision for taxation for 2007-08 10,000 Provision for taxation for 2008-09 17,410 Proposed dividend 18,000 Tax on Distributed Profit 2,880 ______2,25,160 2,25,160 N.B. Alternatively, the balance sheet may be prepared in vertical form also. 27 EP-CACMA-June 2010
Question 4 (a) Balance sheet of Diamond Ltd. as at 30th June, 2009 is given below : Liabilities Rs. Share capital : 40,000 Shares of Rs.10 each 4,00,000 General reserve 80,000 Profit and loss account 64,000 Sundry creditors 2,56,000 Income-tax reserve 1,20,000 9,20,000 Assets Land and buildings 2,20,000 Plant and machinery 2,60,000 Patents and trade marks 40,000 Preliminary expenses 24,000 Stock 96,000 Debtors 1,76,000 Bank balance 1,04,000 9,20,000 The expert valuer valued the land and buildings at Rs.4,80,000, goodwill at Rs.3,20,000 and plant and machinery at Rs.2,40,000. Out of the total debtors, it is found that debtors of Rs.16,000 are bad. The profits of the company have been as follows : 31st March, 2007 : Rs.1,84,000 31st March, 2008 : Rs.1,76,000 31st March, 2009 : Rs.1,92,000 The company follows the practice of transferring 25% of profits to general reserve. Similar type of companies earn at 10% of the value of their shares. Plant and machinery, and land and buildings have been depreciated at 15% and 10% respectively. Ascertain the value of shares of the company by using— (i) Intrinsic value method; (ii) Yield value method; and (iii) Fair value method. (6 marks) (b) Rax Ltd. invited applications from public for 1,00,000 equity shares of Rs.10 each at a premium of Rs.5 per share. The entire issue is underwritten by the underwriters A, B, C, and D to the extent of 30%, 30%, 20%, and 20% respectively with the provision of firm underwriting of 3,000, 2,000, 1,000 and 1,000 shares respectively. Underwriters are entitled to maximum commission as per law. The company has received applications for 70,000 shares from public out of which applications for 19,000, 10,000, 21,000 and 8,000 shares were marked in favour of A, B, C and D respectively. Calculate the liability of each underwriter treating firm underwriting on par with marked applications. EP-CACMA-June 2010 28
Also ascertain the underwriting commission @ 2.5% payable to each underwriter. (6 marks) (c) “Buy-back may be misused by the corporate entities at the cost of innocent investors.” Give your comments. (3 marks) Answer 4(a) Diamond Ltd. Valuation of shares (i) Intrisic value method Assets: Rs. Land and buildings 4,80,000 Goodwill 3,20,000 Plant and machinery 2,40,000 Patents and trade marks 40,000 Stock 96,000 Debtors less bad debts 1,60,000 Bank balance 1,04,000 14,40,000 Less: Liabilities: Sundry creditors 2,56,000 Net assets 11,84,000
Net Assets Intrinsic value of shares (each share) = No.of Shares Rs.11,84,000 = = Rs. 29.60 40,000
(ii) Yield value method Rs. Total profit of last three years 5,52,000 Less: Bad debts 16,000 5,36,000 Rs.5,36,000 Average profit = = 1,78,667 3 Add: Decrease in depreciation on plant and machinery @ 15% on Rs. 20,000 3,000 1,81,667 Less: Increase in depreciation on land and building @ 10% on Rs. 2,60,000 26,000 Average profit 1,55,667 Less: Transfer to reserve @ 25% of Rs. 77,833 38,917 29 EP-CACMA-June 2010
Profit available for dividend 1,16,750 Rs.1,16,750 Rate of dividend = ×100 = Rs.29.187% 4,00,000 Rate of Dividend Yield value of share = × Paid-up value of each share NormalRate of Return
29.187 = × 10 = Rs. 29.19 10 (iii) Fair value method Intrinsic Value + Yield Value Fair value of each share = 2 Rs. 29.60 + Rs. 29.19 = = Rs. 29.40 2 Answer 4(b) Liability of Underwriters (No. of shares)
Particulars Total A B C D
Gross Liability 1,00,000 30,000 30,000 20,000 20,000 Less: Unmarked Applications 12,000 3,600 3,600 2,400 2,400 Balance 88,000 26,400 26,400 17,600 17,600 Less: Marked Applications 58,000 19,000 10,000 21,000 8,000 Balance 30,000 7,400 16,400 − 3,400 9,600 Less: Firm Underwriting 7,000 3,000 2,000 1,000 1,000 Balance 23,000 4,400 14,400 − 4,400 8,600 Adjustment − −1,650 −1,650 +4,400 −1,100 Net Liability 23,000 2,750 12,750 − 7,500 Total Liability including firm underwriting 30,000 5,750 14,750 1,000 8,500
Underwriting Commission The underwriting commission is payable at the rate of 2.5% of the issue price of shares. 2.5 Thus, commission payable to A = 30,000 × Rs.15 × = Rs. 11,250 100 B = Rs. 11,250 2.5 C = 20,000 × Rs.15 × = = Rs. 7,500 100 D = Rs. 7,500 EP-CACMA-June 2010 30
Answer 4(c) It is feared that the buy-back may be misused by the corporate entities at the cost of innocent investors because of following reasons: (i) It will provide ample opportunity for insider trading. The promoters, before the buyback, may understate the earnings by manipulating accounting policies in respect of depreciation, valuation of inventories, etc. and highlight other unfavourable factors affecting the earnings. This would lead to a fall in the quoted prices of shares and the promoter would buy then at low quotations. In this manner, the insiders would make extra money when the company buybacks these shares at a higher price. (ii) Buyback may lead to artificial manipulation of stock prices. (iii) The position of the minority shareholders is weakened as buyback enables the management to increase their control over the company.
PART—B Question 5 (a) State, with reasons in brief, whether the following statements are correct or incorrect : (i) Under Flux method, labour turnover is calculated by number of workers left divided by average number of workers. (ii) In cost plus contracts, the contractor runs a risk of incurring a loss. (iii) There is no need to record attendance of piece rate workers since attendance is not relevant for ascertaining the amount of wages to be paid. (iv) A profit centre whose performance is measured by its return on investment (ROI) is known as investment centre. (v) Contribution is not only the criterion for deciding profitability. (2 marks each) (b) Choose the most appropriate answer from the given options in respect of the following : (i) The rate of change of labour force in an organisation during a specified period is called — (a) Labour efficiency (b) Labour turnover (c) Labour productivity (d) None of the above. (ii) When a contract is not complete at the end of the year, profit on incomplete contract — (a) Is not considered (b) Is considered for inclusion in the profit for the year 31 EP-CACMA-June 2010
(c) Is considered for the inclusion of a part of the year (d) None of the above. (iii) When prices fluctuate widely, the method that will avoid the effect of fluctuations is — (a) FIFO (b) LIFO (c) Simple average (d) Weighted average. (iv) Fixed costs remain fixed — (a) Over a short period (b) Over a long period and within relevant range (c) Over a short period and within a relevant range (d) Over a long period. (v) When the under or over absorbed overheads amount is significant, it should be disposed off by — (a) Transferring to costing profit and loss account (b) Using a supplementary rate (c) Carry over to next year (d) None of the above. (1 mark each) (c) Re-write the following sentences after filling-in the blank spaces with appropriate word(s)/figure(s) : (i) ______expenses are excluded from cost. (ii) An account giving details of cost of production, cost of sales and profit made during a particular period is called ______. (iii) The process of apportionment of factory overheads among production and service department is called ______of factory overheads. (iv) The time for which the employer pays remuneration to workers but obtains no direct benefit is called ______. (v) A system that keeps a running and continuous record that tracks inventories and cost of goods sold on day-to-day basis is called______. (1 mark each) Answer 5(a) (i) Incorrect. Under flux method, labour turnover is calculated by dividing the sum of number of workers left plus the number of workers joined, divided by average number of workers. (ii) Incorrect. In cost plus contracts, the contractor is assured of a fixed percentage of profit over the total cost and there is no risk of incurring any loss on the contract. (iii) Incorrect. Under payment by result system, the payment made has a direct relationship with the output given by a worker. The attendance of the worker EP-CACMA-June 2010 32
or the time taken by him for doing a job has no bearing on the payment. However, to ensure discipline, incentive system, statutory obligation, attendance record is must. (iv) Correct. In investment centre, the manager is expected to earn a satisfactory return on the assets employed in his responsibility centre which is measured by ROI. (v) Correct. Although to maximize profit, resources should be mobilized towards that product which gives the maximum contribution. But in real life, there may be several factors such as, demand for the product, production capacity, availability of material, labour, capital, etc. which may put a limit on the number of units to be produced even if the products give a high contribution. Answer 5(b) (i) (b) - Labour Turnover (ii) (c) - Is considered for the inclusion of a part of the year (iii) (d) - Weighted average (iv) (c) - Over a short period and within a relevant range (v) (b) - Using a supplementary rate Answer 5(c) (i) Notional expenses are excluded from cost. (ii) An account giving details of cost of production, cost of sales and profit made during a particular period is called production account. (iii) The process of apportionment of factory overheads among production and service department is called primary distribution of factory overheads. (iv) The time for which the employer pays remuneration to workers but obtains no direct benefit is called idle time. (v) A system that keeps a running and continuous record that tracks inventories and cost of goods sold on day-to-day basis is called perpetual inventory system. Question 6 Summarised income statement and balance sheet of Progressive Ltd. are given below : Income Statement for the year ended 31st December, 2009 (Rs. ’000) Sales 1,600 Less: Cost of goods sold 1,310 Gross margin 290 Less: Selling and administration expenses 40 Net operating income (EBIT) 250 Less: Interest 45 Earnings before tax 205 Less : Tax paid 82 Net income after tax 123 33 EP-CACMA-June 2010
Earnings per share (EPS) is Rs. 3.075. Balance Sheet as at 31st December, 2009 Liabilities (Rs. ’000) Paid-up capital (40,000 shares of Rs. 10 each fully paid) 400 Retained earnings 120 Debentures 700 Creditors 180 Bills payable 20 Other current liabilities 80 1,500 Assets Net fixed assets 800 Inventory 400 Debtors 175 Marketable securities 75 Cash 50 1,500 Price per share is Rs.15. Industry’s average ratios are : Current ratio 2.4 Quick ratio 1.5 Sales to inventory 8.0 Average collection period 36 days Price per share/book value of share 1.6 Debts to assets 40% Times interest earned 6 Profit margin 7% Price to earnings ratio 15 Return to total assets 11% (i) Progresssive Ltd. would like to borrow Rs.5,00,000 from a bank for less than a year. Evaluate the firm’s current financial position by calculating ratios that you feel would be useful for the bank’s evaluation. (ii) What problem areas are suggested by your ratio analysis ? What are the possible reasons for them? (iii) Do you think that the bank should give the loan? (iv) If Progressive Ltd.’s inventory utilisation ratio (sales to inventory) and average collection period were reduced to industry average, what amount of funds would be generated? (15 marks) EP-CACMA-June 2010 34
Answer 6 Progressive Limited Computation of Ratios for Evaluation (Rs. in Thousands) Firm’s Industry Ratio Average (a) Current Ratio = Current Assets/Current Liabilities Current Assets = Rs.400 + 175 + 75 + 50 = Rs.700 2.5 2.4 Current Liabilities = Rs.180 + 20 + 80 = Rs.280 Current Ratio = 700/280
(b) Quick Ratio = Liquid Assets/Current Liabilities Liquid Assets = Rs.175 + 75 + 50 = Rs.300 1.07 1.5 Quick Ratio = 300/280 (c) Sales to Inventory = Sales/Inventory = 1,600/400 4 8
(d) Average Collection Period = Debtors/Average Daily Sales 40 days 36 days = 175/(1,600/365) (e) Price per Share to Book Value of Share = Price per share/Book value of share 1.15 1.6 = 15/(520/40) Book value of share = (Paid-up capital + Retained earnings)/No. of shares (f) Debts to Assets = Debts/Assets = (700/1,500) x 100 46.7% 40% (g) Times EBIT = Earnings Before Interest and Tax/Interest 5.56 6 = 250/45 (h) Profit Margin = (Net Profit/Sales) x 100 = (123/1,600) x 100 7.7% 7% (i) Price to Earning Ratio = Price per Share/Earning Per Share 4.88 15 = 15/3.075 (j) Return on total assets = Net profit/Total Assets = (123/1,500) x 100 8.2% 11%
(i) Different relevant ratios have been calculated above. The final decision about the loan of Rs.5,00,000 can be taken only after considering and analyzing different ratios and firm’s problems. (ii) Firm’s current ratio is more than industry ratio but quick ratio is less. The 35 EP-CACMA-June 2010
difference in current and quick ratio is due to inventory of Rs.4,00,000 out of current assets of Rs.7,00,000. The firm’s collection period is more than the industry. If it has been increasing in the past, it is a danger signal. Sales to inventory are low and less than industry. It may be due to damaged goods. The credit policy should be reviewed to improve firm’s debts collection. Firm’s debt to assets ratio is higher than the industry, which implies that the firm has taken more loans. Even the interest coverage ratio is little lesser than the industry. The creditors/lenders may not like to advance loans to the firm at the current rate. Therefore, firm may have to pay higher interest in future. The price earning ratio and price per share to book value is quite less than industry. It may be due to higher loans and low utilization of assets. The investment in the firm looks to be risky and it may have adverse effect on firm’s future growth. (iii) Keeping in mind the above analysis the bank cannot advance loan to the firm. Even if the bank agrees for the loan, bank will demand higher rate of interest. (iv) The industry inventory turnover (sales to inventory) ratio is double the firm’s ratio. If we use industry inventory turnover ratio, the firm should have inventory of Rs.2,00,000 but actually its inventory is Rs.4,00,000. if this ratio can be brought to industry level, Rs.2,00,000 can be generated. Based on industry collection period, the receivables should be : Average Daily Sales x Industry collection period Rs.4,400 (approx.) x 36 days = Rs.1,58,400 Currently, debtors are Rs.1,75,000 and therefore a saving of Rs.16,600 is possible. Therefore, Rs.2,16,600 (2,00,000 + 16,600) may be generated if sales to inventory and average collection period is brought to industry level. Question 7 (a) Write short notes on any two of the following : (i) Superiority of zero base budgeting (ZBB) to traditional budgeting (ii) Activity based costing (iii) Cash, cash equivalents and cash flows. (3 marks each) (b) Two manufacturing companies which have the following operating details decided to merge : Company–I Company–II Capacity utilisation (%) 90 60 Sales (Rs. in lakhs) 540 300 Variable costs (Rs. in lakhs) 396 225 Fixed costs (Rs. in lakhs) 80 50 Assuming that the proposal is implemented, calculate –– (i) Break-even sales of the merged plant and the capacity utilisation at that stage. EP-CACMA-June 2010 36
(ii) Profitability of the merged plant at 80% capacity utilisation. (iii) Sales turnover of the merged plant to earn a profit of Rs.75 lakh. (iv) When the merged plant is working at a capacity to earn a profit of Rs.75 lakh, what percentage increase in selling price is required to sustain an increase of 5% in fixed overheads ? (9 marks) Answer 7(a)(i) Superiority of zero base budgeting (ZBB) to traditional budgeting Zero base budgeting is superior to traditional budgeting due the following reasons: (i) Zero base budgeting provides a systematic base for evaluation of different activities. (ii) It gives an opportunity for management to allocate resources to various activities after a proper cost benefit analysis. (iii) It assigns that the functions undertaken are critical for the achievement of the objectives. (iv) It provides a base for a system of management by objectives. (v) It provides a close relationship between departmental budget and corporate objectives / budget. (vi) It helps in identifying wastage and their elimination. Answer 7(a)(ii) Activity based costing It is a technique of costing which is basically used for apportionment of overheads costs in an organisation having products that differs in volume and complexity of production. Under this technique, the overhead costs of the organizations are identified with each activity which is acting as the cost driver, i.e. the cause for incurrence of overhead cost. Such cost drivers may be purchase orders issued, quality inspections, maintenance requests, material receipts, inventory movements, power consumed, machine time, etc. Having identified the overhead costs with each cost centre, cost per unit of cost driver can be ascertained. The overhead costs can be now assigned to jobs on the basis of the number of activities required for their completion. Therefore, ABC technique – is a technique which involves identification of costs with each cost driving activity and making it as the basis for apportionment of costs over different products or jobs. In other words, it is a technique of cost attribution to cost units on the basis of benefits received from indirect activities, i.e. ordering, setting up and assuring quality. Answer 7(a)(iii) Cash, cash equivalent and cash flows Cash comprises cash in hand and demand deposits with banks. Demand deposits mean those deposits which are repayable by banks on demand by the depositor. 37 EP-CACMA-June 2010
Cash equivalents are short term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. Cash equivalents are held for the purpose of meeting short term cash commitments rather than for investments or other purposes. Cash flows are inflows and outflows of cash and cash equivalents. It means the movement of cash into the organisation and movement of cash out of the organization. The difference between cash inflows and outflows is known as net cash flow which can be either net cash inflow or net cash outflow. Answer 7(b) (i) Position of the Merged Plant at 100% capacity (Rs. in lakhs) Company I Company II Total Sales 600 500 1,100 Less: Variable Costs 440 375 815 Contribution 160 125 285 Less: Fixed Costs 80 50 130 Profit 80 75 155 P/V Ratio of the merged plant = [(Contribution ÷ Sales) x (100)] 285 = ×100 = 25.909% 1,100
(Rs. in lakh) FixedCost 130 × 1,100 Break even sales of the merged plant = = = Rs.501.75 lakhs P/V Ratio 285 501.75 Per cent of capacity utilization = ×100 = 45.61% 1,100
(ii) Profitability of the merged plant at 80% capacity Rs.(Lakh) Sales (at 80% capacity i.e., 80% of Rs.1,100 lakh) 880 Less: Variable Costs (80% of Rs.815 lakh) 652 Contribution 228 Less: Fixed costs 130 Profit 98 OR Total contribution at 80% capacity = 285 lakh x 80% = 228 Less: Fixed Costs 130 Profit 98 98 Profitability = × 100 = 11.14% 880 EP-CACMA-June 2010 38
(iii) Sales required to earn a profit of Rs.75 lakh : FixedCosts + DesiredProfit Rs.130 lakh + Rs.75 lakh = = P/V Ratio 285/1100 OR 205 × 1,100 = = Rs.791.23 lakh 285 (iv) Percentage of increase in selling price to sustain 5% increase in fixed overheads: 130 × 5 5% of fixed cost = = Rs.6.5 lakh 100 6.5 Percentage increase in selling price = × 100 = 0.8215% 791.23 Question 8 (a) A company manufactures 5,000 units of a product per month. The cost of placing an order is Rs.100. The purchase price of the raw material is Rs.10 per kg. The re-order period is 4 to 8 weeks. The consumption of raw materials varies from 100 kgs. to 450 kgs. per week, the average consumption being 275 kgs. The carrying cost of inventory is 20% per annum. You are required to calculate –– (i) Re-order quantity (ii) Re-order level (iii) Maximum level (iv) Minimum level (v) Average stock level. Assume 52 weeks in a year. (6 marks) (b) Following information is available for a factory for the year 2008 : Rs. Direct material 3,00,000 Direct wages 2,50,000 Factory overheads 1,50,000 Administrative overheads 1,68,000 Selling overheads 1,12,000 Distribution overheads 70,000 Profit 2,10,000 A work order has been executed in the year 2008 and the expenses incurred were — materials Rs.4,000; and wages Rs.2,500. Assuming that in the year 2009 the rate of factory overheads has increased by 20%, distribution overheads have gone down by 10% and selling and administration overheads have each gone up by 12.5%, at what price should the product be sold so as to earn the same rate of profit on the selling price as in the year 2008 ? Factory overheads are based on direct wages while other overheads are based on factory cost. (9 marks) 39 EP-CACMA-June 2010
Answer 8(a) 2U × P (i) Re-order Quantity = S
2 ×14,300 × Rs.100 = 2 = 1,196 Kgs. Where – U = Annual Requirement = 275 kgs. per week for 52 weeks = 14,300 P = Ordering Cost = Rs.100 per order S = Carrying Cost per unit per annum = 20% of Rs. 10 = Rs. 2 (ii) Re-order Level = Maximum Consumption x Maximum Re-order Period = 450 Kgs. x 8 (weeks) = 3,600 Kgs. (iii) Minimum Stock Level = Re-order Level + Re-order Quantity – (Minimum Consumption x Minimum Re-order Period) = 3,600 Kgs. + 1,196 Kgs. – (100 Kgs. X 4 weeks) = 3,600 Kgs. + 1,196 Kgs. – 400 Kgs = 4,396 Kgs. (iv) Minimum Stock Level = Re-order level– (Normal Consumption x Normal Re-order Period) = 3,600 Kgs. – (275 Kgs. X 6 weeks) = 3,600 Kgs. – 1,650 Kgs. = 1,950 Kgs. (v) Average Stock Level = Minimum Level + ½ of Re-order Quantity = 1,950 Kgs. + ½ x 1,196 Kgs. = 1,950 Kgs. + 598 Kgs. = 2,548 Kgs. OR Maximum Level + Minimum Level
2 6346 = 4,396 Kgs. + 1950 Kgs. = = 3173 Kgs. 2 Answer 8(b) Statement of Cost and Profit for the year 2008 Particulars Rs. Materials 3,00,000 Direct Wages 2,50,000 Prime Cost 5,50,000 Factory Overheads 1,50,000 EP-CACMA-June 2010 40
Factory Cost 7,00,000 Administration Overheads 1,68,000 Cost of Production 8,68,000 Selling Overheads 1,12,000 Distribution Overheads 70,000 Cost of Sales 10,50,000 Profit 2,10,000 Sales 12,60,000 (a) Percentage of Factory overheads on direct wages = 1,50,000 / 2,50,000 x 100 = 60% (b) Percentage of Administrative overheads on factory cost = 1,68,000 / 7,00,000 x 100 = 24% (c) Percentage of Selling overheads to factory cost = 1,12,000 / 7,00,000 x 100 = 16% (d) Percentage of Distribution overheads to factory cost = 70,000 / 7,00,000 x 100 = 10% (e) Percentage of Profit on cost of sales = 2,10,000 / 10,50,000 x 100 = 20% Estimate for the work order Particulars Rs. Materials 4,000 Wages 2,500 Prime Cost 6,500 Factory Overheads (60% of wages + 20% thereof) i.e. 72% of wages 1,800 Factory Cost 8,300 Administration Overheads (24% of factory cost + 12.5% thereof) i.e. 2,241 27% of factory cost Cost of Production 10,541 Selling Overheads (16% of factory cost + 12.5% thereof) i.e. 18% of factory cost 1,494 Distribution Overheads (10% of works cost - 10% thereof) i.e. 9% of 747 factory cost Cost of Sales 12,782 Profit (20% on cost) 2,556 Selling Price 15,338
39 EP–TL– December 2009 TAX LAWS Time allowed : 3 hours Maximum marks : 100
NOTE : All references to sections mentioned in Part - A of the Question Paper relate to the Income-tax Act, 1961 and the relevant Assessment Year 2009-10m unless stated otherwise.
PART A (Answer Question No. 1 which is COMPULSORY and ANY THREE of the rest from this part)
Question 1 (a) Choose the most appropriate answer from the given options in respect of the following having regard to the provisions of the relevant direct tax laws : (i) Income-tax in India is charged at the rate(s) prescribed by — (a) The Finance Act (b) The Income-tax Act (c) The Central Board of Direct Taxes (d) The Ministry of Finance. (ii) Under the Income-tax Act, 1961, depreciation on machinery is charged on — (a) Purchase price of the machinery (b) Market price of the machinery (c) Written down value of the machinery (d) All of the above. (iii) Income accruing in India in previous year is taxable for — (a) Resident (b) Not ordinarily resident (c) Non-resident (d) All of the above. (iv) Sandeep purchased a house for his residential purpose after taking a loan in January, 2007. During the previous year 2008-09, he paid interest on loan Rs.1,67,000. While computing income from house property, the deduction is allowable to the extent of — (a) Rs.30,000 (b) Rs.1,00,000 (c) Rs.1,67,000 (d) Rs.1,50,000.
39 EP–TL– December 2009 40 (v) Which of the following is an ‘asset’ under section 2(ea) of the Wealth-tax Act, 1957 — (a) Equity shares in a company (b) Balance in provident fund (c) Motor car held as stock-in-trade (d) Jewellery for personal use. (1 mark each) (b) Re-write the following sentences after filling-in the blank spaces with appropriate word(s)/figure(s) : (i) Deduction for bad debt is allowed to an assessee carrying on business in the year in which the debt is ______as bad. (ii) Deduction available under section 80GG towards rent paid shall not exceed Rs.______per month. (iii) It is obligatory for an assessee to pay advance tax where the amount of tax payable is Rs.______or more. (iv) A belated return of income can be filed at any time before the expiry of ______from the end of relevant assessment year. (v) Wealth-tax is levied on the net wealth of a person as on 31st March, this date is known as ______date. (1 mark each) (c) Rajan is an employee of a private limited company and gets the following emoluments during the previous year ended on 31st March, 2009 : Salary : Rs.96,000; Salary in lieu of leave : Rs.6,000; Entertainment allowance: Rs.10,000; and Commission : Rs.8,000. Rajan’s son studies in a school which is owned and maintained by the company. The cost of education in a similar school in the locality is Rs.22,000 per year, but the company charges Rs.4,000 from Rajan. Salary of a domestic servant provided to Rajan by the company is Rs.6,000 and the same is paid by the company. The company purchases a computer on 1st April, 2008 for Rs.50,000 which is given to Rajan for office and private use. The company purchases a refrigerator for Rs.20,000 on 30th June, 2008 for personal use of Rajan. Rajan and the company both contribute Rs.12,000 towards recognised provident fund. Rajan deposits Rs.40,000 towards public provident fund. Rajan earns Rs.1,00,000 by way of rent from a vacant plot of land. Compute the taxable income and tax liability of Rajan for the assessment year 2009-10. (5 marks) Answer 1(a)(i) (a) The Finance Act Answer 1(a)(ii) (c) Written down value of the machinery 41 EP–TL– December 2009 Answer 1(a)(iii) (d) All of the above Answer 1(a)(iv) (d) Rs.1,50,000 Answer 1(a)(v) (d) Jewellery for personal use. Answer 1(b) (i) Deduction for bad debt is allowed to an assessee carrying on business in the year in which the debt is Written off as bad. (ii) Deduction available under section 80GG towards rent paid shall not exceed Rs. 2,000 per month. (iii) It is obligatory for an assessee to pay advance tax where the amount of tax payable is Rs. 5,000 or more. (iv) A belated return of income can be filed at any time before the expiry of one year from the end of relevant assessment year. (v) Wealth-tax is levied on the net wealth of a person as on 31st March, this date is known as Valuation date. Answer 1(c) Computation of Taxable income of Mr. Rajan for the Assessment Year 2009-10 Rs. 1. Income from salary : Salary 96,000 Salary in lieu of leave not availed 6,000 Entertainment Allowance 10,000 Commission 8,000 Educational facility to Rajan’s son* [22,000 – 1,000 x 12 – 4,000] 6,000 Free use of computer — Facility of Refrigerator [20,000 x 10% x 9/12] 1,500 Salary of domestic servant 6,000 Employer’s Contribution to RPF in excess of 12% of salary [12,000 – 12% of 96,000] 480 Gross Salary 1,33,980 Less : Deduction under section 16 — Income from salary 1,33,980 Income from other sources 1,00,000 EP–TL– December 2009 42 Gross Total Income 2,33980 Less deduction under section 80C 52,000 [12,000 + 40,000] Contribution to PF PPF Taxable Income 1,81,980 Computation of Tax : On First Rs.1,50,000 — On balance [1,81,980 – 1,50,000] @ 10% 3,198 Add EC & SHEC (3%) 96 3,294 Tax liability rounded off 3,290 Note : There are two views regarding valuation of education facilities. According to another view the entire amount of Rs.18,000/- may included in the total income. Question 2 (a) From the following profit and loss account of Vinay for the year ended 31st March, 2009, compute his total income and tax liability for the assessment year 2009-10 : Rs. Rs. Interest on capital 12,000 Gross profit 5,10,000 Insurance 2,000 Brokerage 30,000 Bad debts 30,000 Bad debts recovered 15,000 Depreciation 34,000 (earlier allowed as Advance tax 25,000 deduction) General expenses 12,000 Sundry receipts 18,000 Advertisement 5,000 Interest on debentures Salary (including salary (gross) to Vinay Rs. 20,000) 85,000 [TDS Rs.4,120] 40,000 Interest on loan 8,000 Net profit 4,00,000 6,13,000 6,13,000 Additional information : (i) The amount of depreciation allowable as per income-tax rules is Rs. 42,000. (ii) General expenses include Rs.5,000 given as contribution to a political party. (iii) Vinay pays Rs. 5,200 as premium on his own life insurance policy of Rs. 50,000. (iv) Loan was obtained for payment of income-tax. (4 marks) (b) Write short notes on any two of the following : (i) Taxation of zero coupon bonds 43 EP–TL– December 2009 (ii) Share of profit from partnership firm (iii) Exemption of income of newly established units in special economic zone. (3 marks each) (c) State, with reasons in brief, whether the following statements are correct or incorrect: (i) Unabsorbed depreciation of any year can be carried forward for set-off for an unlimited period of time. (ii) An individual is not liable to pay fringe benefit tax. (iii) The entire amount of winning from lotteries is taxable at a special rate of income-tax. (iv) Income of minor child is included in the income of his parents under the Income-tax Act, 1961 in all cases. (v) When the prize is given partly in cash and partly in kind, income-tax will be deducted from cash only. (1 mark each) Answer 2(a) Computation of total income of Mr. Vinay for the Assessment Year 2009-10 Rs. Rs. (i) Income from business : Net profit as per Profit & Loss A/c 4,00,000 Add : Inadmissible Expenditure Interest on Capital 12,000 Advance Tax 25,000 Contribution to a political party 5,000 Salary to Vinay 20,000 Interest on Loan 8,000 70,000 4,70,000 Less : Dep. Undercharged (42,000 – 34,000) 8,000 4,62,000 Less non-business income credited to P&L A/c Interest on debentures 40,000 Income from business 4,22,000 Income from other sources (Interest on debentures) 40,000 Gross Total Income 4,62,000 Less : Deduction U/s 8-C Life Insurance premium 5,200 Contn. To political parties 5,000 10,200 Total Income : (4,51,800) EP–TL– December 2009 44 Rs. Rs. Computation of Tax : On First Rs.1,50,000 — On Next rs.1,50,000 @ 10% 15,000 On Balance Rs.(1,51,800) @ 20% 30,360 30,360 45,360 Add EC & SHEC (3%) 1,391 Total amount of Tax 46,721 Less : Advance Tax & TDS [25,000+4,120] 29,120 17,601 Tax Payable rounded off 17,600
Answer 2(b)(i) Taxation of zero coupon bonds The Finance Act, 2005 has introduced the procedure regarding the taxation of the income on the Zero Coupon Bonds issued on or after 1.6.2005. According to Section 2(48) Zero Coupon Bonds means a bond : (i) Issued by any infrastructure capital company fund or public sector company; (ii) In respect of which no payment or benefit is received or receivable before maturity or redemption from the above companies/funds. (iii) Which the Central Government may by notification in the Official Gazette specify in this behalf. The payment of and benefit from zero coupon bond shall be received or receivable from the issuing company/fund only at the time of maturity or redemption. If such zero bonds are held for less then 12 months, the gain on such bonds shall be short-term capital gain and if these bonds are held for more than 12 months the gain shall be long- term capital gain. Long-capital gain on these bonds shall be chargeable to tax at minimum of the following : (i) 20% of long-term capital gain after indexation of cost of such bonds;
(ii) 10% of long-term capital gain before indexation of cost of such bonds.
Answer 2(b)(ii)
Share of profit from partnership firm
Share income of a person being a partner of a firm which is separately assessed as such is exempt from tax. For the purposes of this clause, the share of a partner in the total income of a firm separately assessed as such shall be an amount which bears to the total income of the firm the same proportion as the amount of his share in the profits of the firm in accordance with the partnership deed bears to such profits. 45 EP–TL– December 2009 Answer 2(b)(iii) Exemption of income of newly established units in special economic zone According to Section 10AA of the Income Tax Act a newly established unit in a Special Economic Zone (SEZ) shall be eligible for deduction of such profit and gain as are derived from export of articles or things or providing any service, as the case may be, during the previous year relevant to any assessment year commencing on or after the 1st April, 2006. The deduction under this Section shall be allowed for a total period of 15 relevant assessment years as per the limits given below : (a) 100% of the profit and gain derived from the export of such articles or things or from services for the first 5 consecutive assessment years beginning with the Assessment Years relevant to the previous year in which the unit begins to manufacture such articles or thing or provide services. (b) 50% of such profits or gains in the next 5 consecutive Assessment Years. (c) So much of the amount not exceeding 50% of the profits as is debited to profit & loss account of the previous year in respect which the deduction is to be allowed and credited to Special Economic Zone Reinvestment Reserve Account to be created and utilized for the purpose of the business of the Assessee in the manner laid down in sub-section (2) of Section 10AA for the next five consecutive Assessment Years. Answer 2(c)(i) Correct Under Section 32(2) of the Income-tax Act unabsorbed depreciation of any year can be set-off against any income (Except income from salary) of the assessee without time limit whether the business is carried on or not. Answer 2(c)(ii) Correct An individual is not liable to pay Fringe Benefit Tax as its application does not cover individual employers. Answer 2(c)(iii) Correct The entire amount of winning from lotteries without deduction of any expenditure or allowance will be taxable. Winning from lotteries is taxable at a special rate of income tax i.e., 30% + Surcharge + cess 3%. Answer 2(c)(iv) Incorrect Under Section 64(1A) of Income Tax Act all incomes which arises or accrues to the minor child (not being a minor child suffering from any disability) shall be clubbed in the income of his parent whose total income, excluding the minor’s income is greater. EP–TL– December 2009 46 Once the income of the minor child is included in the total income of any one parent clubbing of income of minor child with the same parent will continue in subsequent years also. However, where any income is derived by the minor from manual work or from any activity involving application of his skill, talent or specialized knowledge and experience, it will not be clubbedin the income of the parent. Answer 2(c)(v) Correct Under Section 194B of the Income Tax Act when the prize is given partly in cash and partly in kind income tax will be deducted from cash prize with reference to the aggregate amount of the cash price and the value of the price in kind. Question 3 (a) Distinguish between any three of the following : (i) ‘Gross total income’ and ‘total income’. (ii) ‘Recognised provident fund’ and ‘statutory provident fund’. (iii) ‘Compulsory best judgment assessment’ and ‘discretionary best judgment assessment’. (iv) ‘Exemptions’ and ‘deductions’. (4 marks each) (b) What is the time-limit for deposit of ‘tax deducted at source’ (TDS) to the credit of Central Government ? (3 marks) Answer 3(a)(i) ‘Gross total income’ and ‘total income’ Gross total income means aggregate amount of taxable incomes computed under five heads of income i.e. salaries, house property, business and profession, capital gains and other sources. While total income means the total amount of income referred to in section 5 computed in the manner laid down in the Income Tax Act. Accordingly after allowing deductions under Section 80-C to 80-U from gross total income the remaining amount is called total income : Total income is more important then GTI since tax calculation is done on total income. GTI can remain more than or equal to total income while total income remains equal to or less then GTI. In GTI rounding-off procedure does not apply, while total income shall be rounded- off to the nearest multiple of ten Rs. Due to exemption agricultural income shall not be included in Gross Total Income but for tax purpose agricultural income shall be added to Total Income. Answer 3(a)(ii) ‘Recognised provident fund’ and ‘statutory provident fund’ Recognized Provident Fund is set-up under the provisions of Employee’s Provident Fund Act, 1952. This fund is maintained by the private sector organizations and factories. 47 EP–TL– December 2009 Apart from this where provident fund maintained by other organization is recognized by the income-tax authorities, such fund is also deemed as recognized provident fund. On the other hand statutory provident fund is set-up under the provisions of Provident Fund Act, 1925. This fund is applicable to the employees of Central Government, State Government and Semi-Government. Under this fund only the employee’s contribution is deposited. The Government does not contribute any amount while in case of RPF both employer and employee can deposit the contribution. Employer’s contribution to RPF up to 12% of salary is exempted and any amount in excess of 12% is included in gross salary of the employee. Interest up to 9.5% p.a. is exempted and any amount of interest in excess of 9.5% p.a. included in the gross salary of the employee. Answer 3(a)(iii) ‘Compulsory best judgement assessment’ and ‘discretionary best judgement assessment’ The Assessing officer, after taking into account all relevant material which he has gathered, is under an obligation to make an assessment of the total income or loss to the best of his judgement and determine the tax payable by the Assessee. This is referred as best judged assessment. Best Judgement assessments are of two types : (i) Compulsory best judgement assessment; and (ii) Discretionary best judgement assessment. Compulsory best judgement assessment shall be made by the Assessing Officer in cases of non-co-operation on the part of the assessee or when the assessee is in default as regards supplying information. According to Section 144, in the following circumstances compulsory best judgement assessment shall be made : Where any person : (i) fails to file any return required to be filed under Section 139(1) or has not filed a belated return or a revised return of his income; or (ii) fails to comply with all the terms and conditions of the notice issued by the Assessing Officer under Section 142 requiring the assessee to produce such accounts or documents that he might desire; or (iii) fails to get the accounts audited by an accountant nominated by the Commissioner or fails to submit a report of such audit in the prescribed time; (iv) fails to comply with the accounting standards prescribed by the Central Government in terms of Section 145(2). (v) Having filed a return, fails to comply with all the terms and conditions of the notice issued to him, requiring the presence of the assesee or the production of evidence on which the assessee may rely in support of the return. Discretionary best judgement assessment (Section 145) : The Income-tax Act empowers the Assessing Officer to make a best judgement assessment even in cases where the Assessing Officer is not satisfied : (i) about the correctness or the completeness of the accounts of the assessee; or EP–TL– December 2009 48 (ii) where no method of accounting has been regularly and consistently employed by the assesse. Answer 3(a)(iv) ‘Exemptions’ and ‘deductions’ Under Section 10 of the Income Tax Act several incomes are exempt from tax. Such incomes are not included in the computation of total income. For example scholarship for education is exempted from tax. So if a person receives scholarship it will be tax free and not included in his income. Any income which is wholly exempted from tax has two characteristics : (i) Income tax is not payable on such income; and (ii) Such income is not included in total income of the Assessee. While under Section 80 of Income Tax Act the deductions specified in Section 80C to 80U are allowed from the Gross Total Income to arrive at the total income. However, the aggregate amount of the deductions cannot exceed the gross total income. The main point of difference between exemption and deductions are as below : (a) Exempted income means income not to be added in GTI while deductions is made from GTI. (b) Exempted items have been given in Section 10 while deductions have been given under Section 80C to 80U. (c) Tax is to be calculated on the Total Income (GTI—Deduction under Section 80C to 80U) while exemptions are not considered while calculating GTI. Answer 3(b) Tax deducted at source (TDS) is required to be paid to the credit of Central Government within the time limit stated below : (i) When payment is made by the Government or when payment is made on behalf of the Government; tax should be deposited on the date of payment itself. (ii) When TDS is done by a non-Government body under Section 193, 194A, 194C, 194D, 194E, 194G, 194H, 194-I, 194J, 195, 196A, 196B, 196C and 196D and the amount is credited to the account of the recipient as on the last date of the accounting year, tax should be deposited within two months from the last date of the accounting year. (iii) When Assessing Officer has permitted to make quarterly payment which is covered by Sections 194A, 194D and 194H, TDS is required to be deposited upto July 15, October 15, January 15 and April 15 for respective quarters. (iv) When Assessing Officer has permitted to make quarterly payment relating to payment of salary, TDs has to be credited to Government treasury upto June 15, Sept. 15,. Dec. 15 and March 15 for respective quarters. (v) In any other case, TDS is to be credited within one week from the last date of the month in which deduction is made. 49 EP–TL– December 2009 Question 4 (a) What are the special provisions for computing profits and gains of retail business? (5 marks) (b) What are the provisions relating to clubbing of income arising to spouse from the assets transferred ? (5 marks) (c) Alka is carrying on textile business. Compute her net wealth from the following details of her assets and also determine her wealth-tax liability for the assessment year 2009-10 : Market Value (Rs.) (i) Land in rural area (it lies within 8 kms. from a municipality having a population of more than 10,000; land was purchased in 1990; construction is permissible) 48,00,000 (ii) Land in urban area (held as stock-in-trade since 2001) 35,50,000 (iii) Motor cars 8,60,000 (iv) Aircraft for use of employees and auditors 1,25,00,000 (v) Bank balance 12,00,000 (vi) Guest house situated in rural area 10,50,000 (vii) Residential flats of identical size provided to employees near the factory (salary of employees does not exceed Rs. 5,00,000 in a year) 30,00,000 (viii) Residential house given to general manager (whose annual salary is Rs.15,00,000) 25,00,000 (ix) Cash in hand as per cash book 2,00,000 (x) Two residential houses let-out on rent (value of each being Rs.22 lakh; one is let-out for 250 days during the financial year 2008-09). Alka has taken a loan of Rs.24,00,000 for acquiring the aircraft; Rs.5,50,000 for urban land; and Rs.4,00,000 for residential house given to general manager. (5 marks) Answer 4(a) Provisions for computing profits and gains of retail business (Section 44AF) The broad features of the scheme are as under : (a) Notwithstanding anything to the contrary contained in section 28 to 43C, in the case of an assesee engaged in retail trade in any goods or merchandise, a sum equal to 5% of the total turnover in the previous year on account of such business shall be deemed to be profits and gains of such business chargeable under the head profits and gains of business or profession. The assessee has to declare a higher income if it is more than the aforesaid amount of 5%. The scheme shall not be applicable if the total turnover of such retail trade exceeds Rs.40 lakhs in the previous year. EP–TL– December 2009 50 (b) The other features of the scheme are as given below : (i) Any deduction allowable under the provisions of Sections 30 to 38 shall for the purpose of above income be deemed to have been already given full effect to and no further deduction under these sections shall be allowed. However, remuneration to working partner and interest paid or payable to partners shall be allowed as education from the income computed under this section.Such deduction shall however be subject to conditions and limits specified under section 40(b). (ii) The written down value of any asset used for the purpose of the business shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of depreciation for each of the relevant assessment years. (iii) The provisions of sections 44AA and 44AB and 44AB shall not apply in so far as they relate to this business and in computing the monetary limits under these sections, the total turnover or as the case may be, the income from said business shall be excluded. (iv) The assessee may choose not to opt for this scheme and may declare an income lower than the specified amount. In this case, the assessee shall have to keep and maintain books of account as per Section 44AA and get his accounts audited as per Section 44AB. Answer 4(b) Income from assets transferred to the spouse [Section 64(1)(iv)] In computing the total income of an individual, all such income as arises directly or indirectly, subject to the provision of Section 27(i), to the spouse of such individual from assets transferred directly or indirectly to the spouse of such individual otherwise than for adequate consideration or in connection with an agreement to live apart shall be included. As per this provision, if an individual transfers any asset other than house property to his/her spouse, the income from such an asset shall be included in the total income of the transferor. This provision is not applicable to house property because in that case the transferor is deemed to be the owner of the house property and the annual value of the property is taxed in the hands of the transferor as per Section 27. The income from the transferred assets shall not be clubbed in the following cases: (i) If the transfer is for adequate consideration; (ii) The transfer is under an agreement to live apart; (iii) If the relationship of husband and wife does not exist, either at the time of transfer of such asset or at the time of accrual of the income Where a gift has been made, prior to the solemnization of the marriage, to the would be wife, the provisions of Section 64(1)(iv) cannot be attracted for the assessment year in respect of the income derived from such gifted amount. 51 EP–TL– December 2009 Extent of inclusion under sections 64(1)(iv), (vi), (vii) and (viii) in cases of inadequate consideration : There may be cases where the transfer of assets to spouse is for consideration passed, but the amount of the consideration is not adequate. Property worth Rs.1,50,000 may have been transferred for a consideration of Rs.1,00,000 only. In such cases, the income from the property includible in the spouse would be in the proportion of the inadequacy of the consideration, i.e., Rs.50,000. Thus, if the income from the property is Rs.3,000, only Rs.1,000 will be included under these provisions in the transferor’s income. Answer 4(c) Computation of Net Wealth of Mrs. Alka for the Assessment Year 2009-10
Particulars Amount (Rs.)
Land in rural area 48,00,000 Land in Urban Area (Exempt for 10 years) Nil Motor Cards 8,60,000 Aircraft [being used for business) Exempt Bank balance [not an asset] Nil Guest House 10,50,000 Residential flats [Salary of employees does not exceed Rs.5 lac] Exempt Residential House to Managing Director 25,00,000 Let out residential house [one let out for less than 300 days] 22,00,000 Cash in hand [Rs.2,00,000 – Rs.50,000) being an individual 1,50,000 Gross Wealth 1,15,60,000 Less amount of loan used in acquiring residential house Given to Managing Director 4,00,000 Net Wealth 1,11,60,000 Wealth Tax @ 1% on (Rs.1,11,60,000 – Rs.15,00,000) Rs. 96,60,000 = Rs.96,600
Note : Loans in respect of exempted assets are not deductible. Question 5 (a) Anurag sells a plot of land on 8th July, 2008 for Rs.40 lakh and paid brokerage on its sale @1%. He purchased this plot on 19th December, 1986 for Rs.4,20,000. On 1st February, 2009, he purchased a residential house for Rs.15 lakh. He owns one residential house on 8th July, 2008. The cost inflation index for 1986- 87 was 140 and for 2008-09 is 582. Find out the amount of capital gains chargeable EP–TL– December 2009 52 to tax for the assessment year 2009-10. Suppose Anurag sells the new residential house before 1st February, 2012, what will be the taxable amount of capital gains and in which year it will be charged to tax ? If Anurag purchases any other residential house before 1st February, 2011, what will be the taxable amount of capital gains and in which year it will be charged to tax ? (5 marks) (b) Danny has the following investments in the previous year ended 31st March, 2009: (i) Rs.7,160 received as interest on securities of Karnataka government. (ii) Rs.9,000 received as interest on securities of a listed paper manufacturing company. (iii) Rs.7,200 received as interest on the unlisted securities of a sugar company. (iv) Rs.30,000, 11% securities (unlisted) of a textile company. (v) Rs.20,000, 10% Tamil Nadu government loan. (vi) Rs.50,000, 13.5% listed debentures of Dolly Ltd. Interest on all securities is payable on 30th June, and 31st December. The bank charges 1.5% commission on net realisation of interest as collection charges. Danny also received Rs.15,000 as director’s fee from a company. His other incomes are –– winnings from horse race : Rs.25,000 (gross); and interest on post office savings bank account : Rs.6,000. Find out taxable income of Danny from other sources for the assessment year 2009-10. (5 marks) (c) “Loss under any head of income for any assessment year can be set-off against the income from other heads of income but when it has to be carried forward for being set-off, it can only be set-off from income under the same head.” Explain. (5 marks) Answer 5(a) Computation of Income from Capital Gains of Mr. Anurag for the Assessment Year 2009-10.
Particulars Amount (Rs.)
Sales consideration 40,00,000 Less : Brokerage on Sales @ 1% 40,000 Net sales consideration 39,60,000 Less : Indexed Cost of Acquisition 4,20,000 x 582/140 17,46,000 LTCG 22,14,000 Less : Exemption under section 54F 8,38,636 (22,14,000 x 15,00,000/39,60,000) 13,75,364 Taxable Income from Capital Gains 13,75,364 If Mr. Anurag sells the new house before February, 2012 then Rs.(8,38,636) being the amount of capital gains exempted during the Assessment Year 2009-10 under 53 EP–TL– December 2009 section 54F will be chargeable to tax for the year in which the house is sold as long-term capital gains. If Mr. Anurag purchases any other residential house before February 1, 2011 but after July 8, 2010 then he will not have any tax liability on account of Capital Gain. If Mr. Anurag purchases any other residential house before July 8, 2010 (i.e., within two years from the date of transfer of the original asset) then Rs. 8,38,638 will be taxable as long-term capital gains for the year in which another house is purchased. Answer 5(b) Computation of Income from other sources of Mr. Danny for the Assessment Year 2009-10.
Particulars Amount (Rs.)
Karnataka Government Securities (No TDS) 7,160 Paper Company Securities (9,000 x 100/89.7) 10,034 Sugar Mill Company Securities (7,200 x 100/79.4) 9,068 Textile Company Securities 3,300 Tamilnadu Government Loan (No TDS) 2,000 DCM Ltd. Debentures (listed) 6,750 Director’s Fee 15,000 Winnings from Horse races 25,000 Interest on Post Office Saving Bank A/c Exempt Gross Receipts 78,312 Less : Deduction under Section 57 for collection charges 511 Taxable Income from other sources 7,7801 Computation of Collection Charges
Particulars Amount (Rs.)
Amount of Collection from securities : Karnataka Government Securities (No TDS) 7,160 Paper Company Securities 9,000 Sugar Mill Company Securities 7,200 Textile Company Securities [3,300 x 79.4/100] 2,620.20 Tamilnadu Government Loan 2,000 DCM Ltd. Debentures [6,750 x 89.7/100] 6054.75 Total Net Collection : 34,034.95 Collection Charges @ 1.5% 34,034.95 x 1.5/100 = Rs. 510.52 = Rs. 511 EP–TL– December 2009 54 Answer 5(c) As per Section 70, the general rule is that if the net result in respect of any source under any head of income is loss, the assessee can set it off from his income from any other source under the same head of income for the same assessment year barring a few cases of exceptions. Likewise, as per Section 71, the general rule is that where there is a loss under any head of income, the same can be set-off against the income from other heads during the same assessment year barring a few exceptional cases. When a loss cannot be set-off either under the same head or under different heads because of absence or inadequacy of the income of the same year, it may be carried forward for being set-off from the income of subsequent year/years. However, set-off of losses during the subsequent year/years can be made only from the same head of income from which the loss accrued during previous year/years. This is clear from the rules given under Section 71B, 72, 73, 74 an 74A : (i) Carried forward loss under the head “Income from house property” as per Section 71B, can only be set-off from income under this head only upto a maximum period of 8 assessment years. (ii) Carried forward business loss of non-speculative business, as per Section 72, can be set-off from income from business only upto a maximum of 8 assessment years. (iii) Carried forward loss of speculative business, as per Section 73, can be set off from income from speculative business only over a maximum period of 4 Assessment Years. (iv) Carried forward capital loss, as per Section 74, can be set-off from income from capital gains of subsequent year’s upto a maximum period of 8 assessment years. However, long-term capital loss can only be set-off from long-term capital gains; short-term capital loss can be set-off from both-short-term as well as long-term capital gains. (v) Carried forward loss from activity of owning and maintaining race horses can be set-off from income from this business activity only chargeable to tax under the head “income from other sources” upto a maximum period of 4 assessment years. Question 6 (a) Rohit is the owner of a house property, its municipal valuation is Rs.80,000. It has been let-out for Rs.1,20,000 per annum. The local taxes payable by the owner amount to Rs.16,000, but as per agreement between the tenant and the landlord, the tenant has paid the amount direct to the municipality. The landlord, however, bears the following expenses on tenant’s amenities : Rs. Extension of water connection 3,000 Water charges 1,500 Lift maintenance 1,500 55 EP–TL– December 2009 Salary of gardener 1,800 Lighting of stairs 1,200 Maintenance of swimming pool 750 The landlord claims the following deductions : Repairs and collection charges 7,500 Land revenue paid 1,500 Compute the taxable income of Rohit from the house property for the assessment year 2009-10. (10 marks) (b) What are ‘capital assets’ ? What items are not included in capital assets ? (5 marks) Answer 6(a) Computation of income from house property for the assessment year 2010-11 Gross annual value : to be higher of the following: Rs. Rs. Rs. (a) Municipal valuation Rs. 80,000 Or (b) De facto rent (Rs. 1,20,000 less value of amenities) Rent Received: 1,20,000 Less : Value of the amenities provided by the assessee: (i) Extension of water connection not deductible as it is capital expenditure (ii) Water charges 1,500 (iii) Lift maintenance 1,500 (iv) Salary of gardener 1,800 (v) Lighting of stairs 1,200 (vi) Maintenance of swimming pool 750 (6,750) Gross annual value 1,13,250 Less : Local tax Rs. 16,000 : No deduction is permissible as the taxes have been paid by the tenant — Net annual value 1,13,250 Less : Deduction from net annual value: 30% of Net Annual Value 33,975 Taxable Income 79,275 EP–TL– December 2009 56 Answer 6(b) Section 2(14) of the Income-tax Act defines the term “capital asset” to mean : Property of any kind held by an assessee whether or not connected with his business or profession but does not include : (i) Any stock-in-trade, consumable stores or raw-materials held for the purposes of his business or profession; (ii) Personal effects that is to say, movable property (including wearing apparel and furniture but excluding jewellery) held for personal use by the assessee or any member of his family dependent on him. Jewellery includes ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi- precious stone, and whether or not worked or sewn into any wearing apparel and precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel; (iii) Agricultural land in India, not being land situate (a) within the jurisdiction of a municipality or a cantonment board and which has a population of not less than 10,000 according to the last preceding census, or (b) in any area within such distance, not being more than eight kilometers from the local limits of any Municipality or cantonment board, as the Central Government may, having regard to the extent of any scope for urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette; (iv) 6½ per cent Gold Bonds, 1977 or 7 per cent Gold Bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central Government; (v) Special Bearer Bonds 1991 issued by the Central Government. (vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government. PART B Question 7 Attempt any four of the following : (a) “Service tax is generally payable by the service provider, but there are certain situations in which service receiver is liable to pay service tax.” Explain. (5 marks) (b) What are the due dates for payment of service tax by different assessees ? (5 marks) (c) Indicate the amount of interest payable for late payment of service tax and the amount of penalty payable for late filing of return of service tax. (5 marks) (d) Explain the provisions regarding submission of return under service tax. (5 marks) (e) What is the basis of calculation of service tax payable ? Explain the provisions governing valuation of taxable services. (5 marks) 57 EP–TL– December 2009 (f) Choose the most appropriate answer from the given options in respect of the following : (i) What would be the value of taxable service, if gross amount charged by a service provider on 5th March, 2009 is Rs.9,000 –- (a) Rs. 8,010 (b) Rs. 8,160 (c) Rs. 9,000 (d) Rs. 8,100. (ii) If Raj has collected any amount of service tax from Brij which is not required to be collected, Raj shall pay the amount so collected to –– (a) Brij (b) The Central Government (c) Keep it with himself (d) None of the above. (iii) E-payment of service tax is compulsory in the case of an assessee who had paid service tax in the preceding financial year equal to at least –– (a) Rs. 10 lakh (b) Rs. 40 lakh (c) Rs.50 lakh (d) Rs. 1 crore. (iv) Upto what amount, the value of all taxable services provided by a service provider during a financial year is exempt from payment of service tax — (a) Rs. 4 lakh (b) Rs. 8 lakh (c) Rs. 10 lakh (d) Rs. 12 lakh. (v) If a corporate assessee has paid Rs.15,000 as excess service tax during the previous half-year ending period, this excess amount can be adjusted against its subsequent tax liability –– (a) Equally every month (b) Equally per quarter (c) In one lump-sum (d) Equally on half-yearly basis. (1 mark each) EP–TL– December 2009 58 Answer 7(a) Service tax is generally payable by the service provider but in situations referred to in Rule 2(1)(d), the person receiving the service is liable to pay service tax in the notified cases as is clear from the following table :
Sl.No. Person liable to pay service tax Notified service
1. The DG of Posts & Telegraph, Chairman Telecommunication service MTNL, a licence holder under Indian Telegraph Act 2. Insurer or re-insurer General insurance business 3. Person carrying on business of general Insurance auxiliary services insurance or life insurance provided by insurance agent 4. Person who pays or is liable to pay freight Services in relation to himself or through his agent in road transport of goods by road goods carriage 5. Recipient of service Services provided or to be provided by any person from abroad to any person in India 6. Mutual fund or asset management Business auxiliary service of company distribution of mutual fund 7. Body corporate or firm who receives Sponsorship services sponsorship services provided in India. The persons liable to pay service tax will have to get themselves registered. Answer 7(b) In the case of individuals, proprietary firms and partnership firms, service tax is paid quarterly—April to 1 to June 30; July 1 o Sep.30; Oct. 1 to Dec.31 and Jan. 1 to March 31. In their case the due date for payment of service tax is 5th day of the month immediately following the relevant quarter. Therefore, on this basis July 5 will be the due date for service tax related to the first quarter; Oct. 5 for the second quarter and Jan 5, for the third quarter. There is one exception to this rule which provides that service tax received during the month of March or the quarter ending March shall be paid to the credit of Central Government by March 31 of the Calendar year. Therefore, for the last quarter Jan. 1 to March 31, March 31 is the due date of payment of service tax. Also when tax is deposited electronically through internet banking, the due date will be 6th day of the month immediately following the end of relevant quarter. So, July 6, Oct. 6 and Jan. 6 will be the due dates for payment of service tax when tax is deposited through internet in regard to the first three quarters but due to the above exception March 31 will be the due date for the last quarter even in this case. In the case of companies and HUF, the due date of payment of service tax is 5th of the month immediately following every calendar month and 6th of the month immediately following every calendar month when service tax is paid through internet. In the case of 59 EP–TL– December 2009 these assesses, service tax is paid every month and not quarterly as is the case with other assesses. For example, the due date for payment of service for the first calendar month of the financial year, which is April, will be May 5 (May 6 when tax is paid through internet) and so on. But for last month of the Financial Year, which is March, March 31 will be the due date for payment of service tax due to the exception as stated above. If the last day of payment of service tax is a public holiday, tax can be paid on the succeeding day which should be a working day. Answer 7(c) According to Section 75 of the Service Tax Act, simple interest @ 13% is payable for late payment of service tax. Interest is payable only for the period of delay beginning with first day after the due date and ending with the actual date of payment of service tax. For example, suppose the due date of service tax is May 6 and actual date of payment is May 21. Interest in this case will be paid for 15 days @ 13% per annum simple interest. Rule 7C provides for the amount of penalty imposable by the Central Government for late filing of return of service tax. If the delay is upto 15 days, a penalty of Rs.500/-, if the delay is for 15 days to 30 days, a penalty of Rs.1,000; if delay is for 31 days or more, a penalty of Rs.1,000 plus Rs.100 per day from 31st day onwards subject to a maximum of Rs.2,000 shall be imposed. Answer 7(d) Provisions regarding returns are given below : (i) Every person liable to pay the service tax needs to self assess the tax due on the services provided by him. Further a return must be furnished to the superintendent of Central Excise in Form ST-3. (ii) The return is to be filed on half year basis i.e., (1st April to 30 Sept. & 1 Oct to March 31). (iii) The half yearly return should be filed in triplicate on or before the 25th of the month following the particular half year. (iv) Return under Section 70 contains general information like financial year, half yearly period, name of the assessee, registration number of premises and categories of taxable services for which the return is filed. Besides it contains month wise details of payment of service tax etc. (v) Copies of TR 6 Challan indicating the payment of Service Tax and Memorandum in Form ST-3A should be submitted along with the return. (vi) At first time of filing of return every assessee must furnish a list of all accounts maintained by the assessee. (vii) Assessee can file ST-3 Return by registered post with concerned divisional office on or before due date. (viii) If the assessee is providing more than one taxable service he should file only one return. In this case service wise details should be given in the return instead of a single total figure for all the services. EP–TL– December 2009 60 (ix) Even if no services have been provided during a half year and no service tax is payable the assessee may file a nil return within the prescribed time limit. (x) Within 60 days from the date of filing of original return an assessee can file revised return to rectify mistakes. (xi) Electronic filing of return of service tax, facility is also available to file service tax return. Answer 7(e) According to Section 67 of the Finance Act, 1994 the amount of service tax is calculated on the basis of value determined under this Section. If value cannot be determined as per Section 67 valuation shall be made on the basis of valuation Rules, 2006. The provisions of Section 67 regarding valuation of taxable services are as follows: (i) The consideration for a taxable service shall be the gross amount charged by the service provider for the service provided or to be provided; (ii) If the consideration for a taxable service is in term of money the value of such service shall be the gross amount charged by the service provider for such service provided or to be provided. (iii) If the consideration for a taxable service is not received wholly or partly in money the value of taxable service shall be the amount of money as with addition of service tax charged is equivalent to the consideration. (iv) If consideration for a taxable service is not ascertainable value of such service will be on the basis of valuation rules; (v) If the gross amount charged by the service provider is inclusive of service tax payable the value of taxable service shall be calculated in the manner that with addition of service tax payable the total is equal to the gross amount charged. (vi) The gross amount charged for the taxable service can be received before during or after the provision of taxable service. (vii) Money includes any currency, cheque promissory notes, letter of credit, draft pay order, travelers cheque money order etc. but does not include currency that is held for its numismatic value; (viii) Gross amount paid includes payment by cheque, credit card, deduction from account and any firm of payment by issue of credit notes or debit notes andbook adjustment. Answer 7(f)(i) (a) Rs. 8,160 (w.e.f. 24.02.2009) Answer 7(f)(ii) (b) Central Government Answer 7(f)(iii) (c) Rs.50 lac 61 EP–TL– December 2009 Answer 7(f)(iv) (c) Rs.10 lac Answer 7(f)(v) (a) Equally every month PART C Question 8 Attempt any four of the following : (i) How would you take input tax credit when goods purchased are transferred by the dealer to his branch in any other State ? (ii) “A registered dealer can set-off the amount of input tax against the amount of his output tax.” Explain. (iii) Explain the procedure of registration under ‘value added tax’ (VAT). (iv) In what purchases input tax credit is not allowed under VAT ? (v) What are the deficiencies in the design of VAT that has been adopted by the States in India ? Give your opinion. (vi) “Tax credit or invoice method has been adopted universally because of the inherent advantages in the credit method of calculating tax liability.” Explain. (5 marks each) Answer 8(i) In case of stock transfer of output outside, the State, input tax credit paid in excess of 2%, shall be eligible for tax credit. Since inter-State sale carries CST @ 2% and this not VAT-able in the importing State, corresponding tax incidence has to be kept for inter- state stock transfers. Answer 8(ii) VAT aims at providing set-off for the tax paid earlier and this is given effect through the concept of input tax credit. Set-off of the input tax credit in relation to any period means setting off the amount of input tax by a registered dealer against the amount of his output tax. Tax paid on the inputs is termed as input tax. This amount is adjusted against the tax payable by the purchasing dealer on his sales. This credit availability is called input tax credit. Input tax is the tax paid or payable in the course of business on purchase of any goods made from a registered dealer of the State. Output tax means the tax charged or chargeable under the Act by a registered dealer for the sale of goods, in the course of business. In other words input tax is the tax a dealer pays on his local purchases of business inputs, which include the goods that he purchases for resale, raw material, capital goods as well as other inputs for use directly or indirectly in his business and output tax is the tax that a dealer charges on his sales that are subject to tax. The input tax credit is to be given for both manufacturers and traders for purchases of inputs, EP–TL– December 2009 62 supplies meant for both sale within the state as to other states, irrespective of when these were utilized or sold. This also reduces immediate tax liability. It is also to be noted that in certain cases partial input of tax credit is available in respect of input used for manufacture of exempted goods. Input tax credit is allowable to a registered dealer for purchase of any goods made within the state from a dealer having a valid certificate of registration under the Act. Input tax credit on capital goods is available for traders and manufacturer. Answer 8(iii) Every dealer upto the retailer level is required to be registered with the sales tax department to avail the credit of input tax. However, there would be a threshold turnover level. The retailers with turnover below the threshold can opt not to register but to pay a nominal composition tax. However, such dealers are not entitled to take credit of prior stage tax, nor can they pass the credit to their buyers. In effect the VAT chain breaks at their stage. Those opting not to register under VAT can opt for general registration. Registration of dealers with gross annual turnover above the prescribed limit will be compulsory. There will be a provision for voluntary registration for dealers with gross annual turnover of less than the prescribed limit. All existing dealers will be automatically registered under the VAT Act. A new dealer will be allowed 30 days time from the date of his being liable to get registered. Small dealers with gross annual turnover not exceeding the prescribed limit will not be liable to pay VAT. States will have flexibility to fix threshold limit within the prescribed limit. Small dealers with annual gross turnover not exceeding Rs.50 lakh who are otherwise liable to pay Vat shall however have the option for a composition scheme with payment of tax at a small percentage of gross turnover. The dealers opting for the composition scheme will not be entitled to input tax credit. Answer 8(iv) Input tax credit is not allowed under VAT in respect of the following purchases : (a) The dealers opting for the composition scheme will not be entitled to input credit on their purchases; (b) When a certain sale is exempted from tax, the dealer effecting the exempted sale will not be entitled to any Vat credit on the inputs purchased by him; (c) Input tax credit is not available on the purchases made from an unregistered dealer. (d) Input tax credit is not available if the final product are not sold but given as free sample. Answer 8(v) Some crucial deficiencies of VAT design adopted by states in India are as follows : (i) It does not cover all goods and services that comprise in the final consumption. Services are not at all included. The Central Government has not yet delegated the powers to tax services to States. (ii) Under continuous pressure from various forces the list of exempted commodities from VAT is quite big. 63 EP–TL– December 2009 (iii) The states have no power of going above or below the “floor rates” even though floor rate implies that discretionary rates may as well can be adopted by states. Also, no rebate is given for tax on purchases of goods of exempted category at the time of sale to a final consumer. (iv) The general rate of VAT which is 12.5% is too high. It is not possible to see this rate to be “revenue neutral” for all states. Rate of Sales Tax of only a few States was a high as 12.5%. (v) Classification of goods is arbitrary and leaves high chances of disputes as to whether a particular item comes within the lower rate category or not. (vi) “Capital goods” and “industrial inputs” have been included in the 4% list. Concessional rate of VAT is not warranted for inputs because the end use of a product by the customer should not affect the VAT to be charged and paid by a seller “set off” automatically takes care of it. Also, reduced rates on inputs increases revenue loss from undeclared sales of finished products. Answer 8(vi) Under tax credit method of VAT, amount of VAT payable is arrived at by subtracting total tax paid to the suppliers on inputs/purchases from the amount of total tax charged on the outputs/sales. The other methods—addition method and subtraction method are not practicable in the case of a manufacturer when the rate of tax is different on inputs and output. The following are the advantages of using tax credit method : (a) Since under this method dealers are required to state the amount of tax in invoices, it makes cross-checking of tax paid at earlier stages more practicable. (b) Dealers at intermediate stages do not have any interest in tax rate because burden of tax is dependent on the tax rate at the final stage; (c) Under this method, through zero rating of exports, exports can easily be relieved of domestic indirect taxes. 1 EP–CL– December 2009 EXECUTIVE PROGRAMME DECEMBER 2009 COMPANY LAW Time 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 stated otherwise. Question 1 Attempt any four of the following : (i) “Some definite criteria will have to be fulfilled to identify a corporation as State ; within the meaning of Article 12 of the Constitution of India.” Comment. (ii) “Diminution of share capital is not always regarded as reduction of capital.” Comment. (iii) “A limited company will have to get certain resolutions passed only through postal ballot instead of transacting the business in the general meeting of the company.” Discuss. (iv) “Oppression need not be continuous.” Discuss. (v) “Common seal of a company will have to be affixed on all the letters and documents of the company.” Discuss. (5 marks each) Answer 1(i) When an association of persons is incorporated according to the law of land and is clothed with legal personality, it becomes a legal entity, separate from the persons constituting it. It is then known as corporation. A company formed under an Act of Parliament or State Legislature is called a statutory corporation. The statutory character of the corporation identifies a corporation as STATE within the meaning of Article 12 of the Constitution of India. The relevant criteria according to the judgement delivered by Bhagwati J. in the case of Raman Dayaram Shetty v. International Airport Authority, AIR 1979 S.C. 1628 and later accepted in other cases including the case of Som Prakash v. Union of India AIR 1981 SC 212 are – (1) the source of the share capital; (2) the extent of State control over corporation and whether it is deep and pervasive; (3) whether the corporation has monopoly status; (4) whether functions of the corporation are of public importance and closely related to Governmental functions; and (5) whether what belonged to a department of government formerly was transferred to the corporation. EP–CL–December 2009 2 Answer 1(ii) Reduction of capital involves writing off past losses against capital, cancellation of the uncalled capital or repayment of surplus capital. It may involve reduction of issued, subscribed or paid up share capital of the company. Diminution of capital under Section 94 does not constitute a reduction of capital within the meaning of the Companies Act. In the following cases, the diminution of share capital is not to be treated as reduction of share capital: (i) when a company cancels shares not taken and/or agreed to be taken by any person [section 94(1)(e)]; (ii) when redeemable preference shares are redeemed; (iii) where any share is forfeited for non-payment of calls; (iv) where the company buy back its own share under section 77A of the Act. In all these cases, the procedure for reduction of capital as laid down in Section 100 is not attracted. Answer 1(iii) As per Companies (Passing of the Resolution by Postal Ballot) Rules, 2001, a certain resolutions will have to be passed only through Postal Ballot. List of businesses in which the resolutions shall be passed only through Postal Ballot are: (i) alteration of the object of Memorandum; (ii) alteration of the Articles of Association in relation to deletion or insertion of provisions defining private company; (iii) buy back of own share; (iv) issue of shares with differential voting rights; (v) change of place of the registered office outside the local limits of the city, town, village; (vi) sale of whole or substantially whole of the undertaking of the company; (vii) giving loan or extending guarantee, or providing security in excess of the limit provided under section 372A. (viii) election of a director under the proviso to sub-section (1) of section 252 of the Act; (ix) variation of rights attached to a class of shares or debenture or other securities as specified under section 106. Answer 1(iv) “Oppression must be a continuous process. This is suggested by the words, ‘are being conducted in a manner...’ used in Section 397. Hence isolated acts of oppression or mismanagement will not give rise to an action under Section 397 of the Act. In Shanti 3 EP–CL– December 2009 Pd. Jain’s Case, the court said: “events have to be considered not in isolation but as a part of a consecutive story. There must be continuous acts on the part of the majority shareholders, continuing up-to-date of petition.” In Ramshankar Prasad v. Sindu Iron Foundry (P) Ltd., AIR 1966 Cal 512, it was held that a petition under Section 397, would be maintainable even if the oppression was of a short duration and of a singular conduct if its effects persisted indefinitely [followed in Maharashtra Power Development Corpn. Ltd. v. Dabhol Power Co. Ltd. (2003) 56 CLA 263 (Bom.)]. Answer 1(v) The statement, “Common seal of a company will have to be affixed on all the letters and documents of the company” is not correct. Statutorily, the common seal is required to be affixed to the following documents: — Power of attorney empowering any person as the company’s attorney to execute deeds in or outside India. [section 48 (1)] — Documents authorizing any person in a territory outside India to affix the company’s official seal to a deed or other documents. [section 50 (2)] — Share certificates. (section 84) — Share warrant. (section 114) Thus, other documents need not be under the common seal [section 54], except to the extent provided in the articles of association. Further, it is not statutorily required that debenture certificates should be issued under the common seal. The company’s seal may, however, be affixed to various deeds and agreements like lease deed, sale deed, debenture trust deeds, promissory notes, negotiable instruments (except cheques), hypothecation, loan agreements, guarantees, etc. Question 2 (a) Choose the most appropriate answer from the given options in respect of the following : (i) Out of the following statements, which one is correct with regard to listing of securities –– (a) The shares and debentures of a public company may be quoted on a stock exchange (b) The shares and debentures of a private company may be quoted on a stock exchange (c) Only the shares and not the debentures of a public company may be quoted on a stock exchange (d) Only the shares and not the debentures of a private company may be quoted on a stock exchange. (ii) Sweat equity shares issued to employees or directors of a company shall be locked-in for a period of — (a) Three years from the date of allotment EP–CL–December 2009 4 (b) Two years from the date of allotment (c) Five years from the date of allotment (d) Twelve months from the date of allotment. (iii) The companies which need not have their own articles of association are — (a) Unlimited companies (b) Companies limited by guarantee (c) Private companies limited by shares (d) Public companies limited by shares. (iv) According to the SEBI Guidelines, the issue of bonus shares should be made within a period of — (a) Three months from the date of approval of the Board of directors (b) Six months from the date of approval of the Board of directors (c) Twelve months from the date of approval of the Board of directors (d) Thirty days from the date of approval of the Board of directors. (v) Out of the following statements, which one is incorrect as regard to the Director Identification Number (DIN) –– (a) DIN is a unique identification number and once obtained is valid throughout the lifetime of a director (b) DIN is mandatory for all directors of Indian companies whether they are citizens of India or not (c) DIN is mandatory for directors of foreign company having branch offices in India (d) A single DIN is required for an individual irrespective of number of directorships held by him. (1 mark each) (b) Re-write the following sentences after filling-in the blank spaces with appropriate word(s)/figure(s) : (i) In case of listed companies, where the shares are transferable through electronic mode, transfers are made through ______instead of physical transfers. (ii) The voting power of a guarantee company having share capital is determined by the ______and not by the guarantee. (iii) ______is the total of the called-up capital remaining unpaid. (iv) No person shall hold office at the same time as small shareholders’ director in more than ______companies. (v) ______includes a reorganisation of share capital of company by consolidation of shares of different classes or division of shares into shares of different classes or by both these methods. (1 mark each) (c) State the salient features of a ‘limited liability partnership’ (LLP). (6 marks) 5 EP–CL– December 2009 Answer 2(a)(i) (a) The shares and debentures of a public company may be quoted on a Stock Exchange. Answer 2(a)(ii) (a) Three years from the date of allotment. Answer 2(a)(iii) (d) Public companies limited by shares. Answer 2(a)(iv) (b) Six months from the date of approval of the Board of directors. Answer 2(a)(v) (c) DIN is mandatory for directors of foreign company having branch offices in India. Answer 2(b) (i) In case of listed companies, where the shares are transferable through electronic mode, transfers are made through Depository Participants instead of physical transfers. (ii) The voting power of a guarantee company having share capital is determined by the shareholding and not by the guarantee. (iii) Unpaid capital is the total of the called-up capital remaining unpaid. (iv) No person shall hold office at the same time as small shareholders’ director in more than two companies. (v) Arrangement includes a reorganisation of share capital of company by consolidation of shares of different classes or division of shares into shares of different classes or by both these methods. Answer 2(c) The salient features of the Limited Liability Partnership are as follows:— (i) The LLP is a body corporate and a legal entity separate from its partners. Any two or more persons, associated for carrying on a lawful business with a view to profit, may by subscribing their names to an incorporation document and filing the same with the Registrar, form a Limited Liability Partnership. The LLP has a perpetual succession; (ii) The mutual rights and duties of partners of an LLP inter se and those of the LLP and its partners shall be governed by an agreement between partners or between the LLP and the partners subject to the provisions of the proposed legislation. There would be flexibility to devise the agreement as per their choice. In the absence of any such agreement, the mutual rights and duties shall be governed by the provisions of the proposed legislation; EP–CL–December 2009 6 (iii) A LLP is a separate legal entity, liable to the full extent of its assets, with the liability of the partners being limited to their agreed contribution in the LLP which may be tangible or intangible in nature or both tangible and intangible in nature. No partner would be liable on account of the independent or un-authorized acts of other partners or their misconduct; (iv) Every LLP shall have at least two partners and shall also have at least two individuals as Designated Partners, of whom at least one shall be resident in India. The duties and obligations of Designated Partners shall be as provided in the law; (v) The LLP shall be under an obligation to maintain annual accounts reflecting true and fair view of its state of affairs. A statement of accounts and solvency shall be filed by every LLP with the Registrar every year. The accounts of LLPs shall also be audited, subject to any class of LLPs being exempted from this requirement by the Central Government; (vi) The Central Government shall have powers to investigate the affairs of an LLP, if required, by appointment of competent inspector for the purpose; (vii) The proposed legislation would confer powers on the Central Government to apply such provisions of the Companies Act, 1956 to provide, inter alia, for mergers, amalgamations, winding up and dissolutions of LLPs, as appropriate, by notification with such changes or modifications as deemed necessary. However, such notifications shall be laid in draft before each House of Parliament for a total period of 30 days and shall be subject to any modification as may be approved by both Houses; (viii) The Indian Partnership Act, 1932 shall not be applicable to LLPs. Other entities may convert themselves to LLP in accordance with provisions of the proposed legislation; (ix) The Central Government shall have powers to make rules for carrying out the provisions of the proposed legislation. Question 3 Distinguish between any four of the following : (i) ‘Reserve capital’ and ‘capital reserve’. (ii) ‘Sweat equity’ and ‘issue of capital on preferential basis’. (iii) ‘ESOS’ and ‘ESPS’. (iv) ‘Motion’ and ‘resolution’. (v) ‘Shelf prospectus’ and ‘red-herring prospectus’. (4 marks each) Answer 3(i) Reserve capital is that part of uncalled capital of a company which the limited company has decided by special resolution in terms of section 99 of the Act, not to call except in the event of or for the purpose of the company being wound up. Hence, Reserve capital is that part of the uncalled share capital which may be called up on happening of that event or at the time of winding up. 7 EP–CL– December 2009 For instance, against a share of face value of Rs.10 only Rs.5 has been paid up. Out of Rs.5 uncalled capital, by passing special resolutions Rs.2 has been kept as Reserve capital which may be called up on happening of certain events or at the time of winding up. Rs.2 is reserve capital per share. Reserve capital is distinct from capital reserve since the latter is created out of profit while reserve capital is part of uncalled share capital. Capital reserve is created out of capital profits or earnings which are not ordinarily distributable among shareholders of the company. The Capital Reserve has the securities premium, capital redemption revaluation of assets etc. Answer 3(ii) Sweat equity shares means equity shares issued by a company to its employees or directors at a discount or for consideration, other than cash for providing know how or making available a right in the nature of intellectual property rights or value additions, by whatever name called. A company can issue sweat equity shares of or class of shares already issued with the approval of the members by special resolution clearly specifying therein the number of shares being issued, current market price, consideration if any, class or classes of directors or employees to which such sweat equity shares have been proposed to be issued. Issue of capital on preferential basis by way of equity shares/FCDs/PCDs or any other financial instruments shall comply with the requirements of Chapter XIII of SEBI (DIP) Guidelines, 2000. Such issues are made to any selected group of persons. The offer prices of the shares should not be less than the higher of the average of the weekly high and low of the closing price of related shares quoted in the stock exchange during the six months or two weeks preceding the relevant date. Answer 3(iii) ESOS or Employee Stock Option Scheme means a scheme under which options given to the whole-time directors, officers or employees of a company to purchase or subscribe at a future date, the securities offered by the company at a predetermined price. No ESOS can be offered to the employees of the company unless the shareholders of the company approve ESOS by passing special resolution in the general meeting. The company shall have freedom to specify the lock-in-period for the shares issued on exercise of option. ESPS or employee stock purchase scheme means a scheme under which the company offers shares to employees as part of a public issue or otherwise. An employee who is a promoter or belongs to a group of promoters shall not be eligible to participate in ESPS. Issue of ESPS requires approval of the shareholders of the company by passing special resolution in the general body meeting of the shareholders. ESPS will have lock-in period of minimum one year. EP–CL–December 2009 8 Answer 3(iv) Motion is a proposal submitted in a meeting for discussion. A motion should be in writing and signed by the mover and put to vote at the meeting by the chairman. Motion becomes a resolution only after the requisite majority of members have adopted it. Resolutions are of three types (a) ordinary, (b) special and (c) resolutions requiring special notice. Certain resolutions are required to be passed by postal ballot. Certain resolutions are required to be filed with the Registrar within 30 days of the meeting in which the resolutions are passed. Answer 3(v) Shelf Prospectus – According to section 60A of the Act – (1) Any public financial institution, public sector bank or scheduled bank whose main object is financing shall file a shelf prospectus. (2) A company (financial institutions, banks) filing a shelf prospectus with the Registrar shall not be required to file prospectus afresh at every stage of offer of securities by it within a period of one year from the date of opening of the first issue of securities. (3) A company filing shelf prospectus shall be required to file an information memorandum of all material facts relating to new charges created, changes in the financial position, etc. (4) An information memorandum shall be issued to public along with shelf prospectus filed at the stage of first offer of securities. Such prospectus will remain valid for one year. The concept of shelf prospectus is to save expenditure on issue of fresh prospectus every time within a period of one year. Red-herring prospectus on the other hand means a prospectus which does not have complete particulars on the price of the securities offered and the quantum of securities offered. The information memorandum and red-herring prospectus carry same obligations as are applicable in the case of prospectus. Every variation between the information memorandum and the red-herring prospectus shall be highlighted by the issuer company and shall be individually intimated to the persons invited to subscribe the securities. Question 4 (a) Define ‘prospectus’. What are the ingredients to constitute a prospectus (6 marks) (b) What are the documents required to be attached with the draft red-herring prospectus to be filed with the Registrar of Companies ? (6 marks) (c) Registrar of Companies can refuse registration of prospectus. Explain. (4 marks) Answer 4(a) Section 2(36) defines a prospectus as “any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting 9 EP–CL– December 2009 deposits from the public or inviting offers from the public for the subscription or purchase of any shares in, or debentures of a body corporate.” The following ingredients may be said to constitute a ‘prospectus’: (a) there must be an invitation to the public; (b) the invitation must be made “by or on behalf of the company or in relation to an intended company”; (c) the invitation must be “to subscribe or purchase”; (d) the invitation must relate to shares or debentures or such other instrument. In essence, it means that a prospectus is an invitation issued to the public to offer for purchase/subscribe shares or debentures of the company (Immugan v. Ranga Ram, A.I.R. 1934 Mad. 641). Any advertisement offering shares or debentures of the company for sale to the public is a prospectus. Answer 4(b) The following documents must be attached to the copy of a draft red-herring prospectus filed with the Registrar: (i) the consent of the expert mentioned in the prospectus; (ii) a copy of every contract relating to the appointment or remuneration of a managing director or manager; (iii) a copy of every material contract not being a contract entered into in the ordinary course of business of the company entered into within two years of the issue of prospectus; (iv) a written statement relating to the adjustments, if any, in respect of figures of any profits or losses, and assets and liabilities; (v) the consent in writing of the person, if any, named in the prospectus as the auditor, legal adviser, attorney, solicitor, issue house, banker, manager to the issue, or broker of the company to act in that capacity; (vi) the consent of the director under section 266 in respect of new directors, if any, named therein; (vii) a copy of the underwriting agreement, if any. Answer 4(c) The Registrar shall not register a prospectus if – (i) it is not dated; (ii) it does not comply with the requirements of section 56 as to the matters and reports to be set out in it; (iii) it contains statement of experts connected with the formation, promotion or management of the company; EP–CL–December 2009 10 (iv) it does not contain a statement from expert stating that he has given and has not withdrawn his consent for inclusion of his name; (v) it does not contain consent of the director or auditor, legal advisers, attorney, solicitor, issue house, banker, managers to the issue, broker named in the prospectus to act as such. Question 5 (a) State, with reasons in brief, whether the following statements are correct or incorrect: (i) A company, being a body corporate, can sue and be sued in its own name. (ii) A government company is neither a government department nor a government establishment. (iii) Under section 14, the memorandum of association of a company may be in any form. (iv) A director is liable for acts of his co-directors. (v) Every shareholder has the right of nomination of shares. (2 marks each) (b) Tuff Ltd. is a public limited company, which was registered in the year 1991 under the Companies Act, 1956. After eighteen years of existence as a public company, the said company now wants to convert itself into a private limited company. Is it possible ? If yes, explain the legal requirements, if any. (6 marks) Answer 5(a)(i) Correct. A company being a body corporate can sue and be sued in its own name. ‘To sue’ means to institute legal proceedings against (a person) or to bring a suit in a court of law. All legal proceedings against the company are to be instituted in its own name. Similarly, the company may bring an action against anyone in its own name. A company, as a person separate from its members, may even sue one of its own members for libel. Answer 5(a)(ii) Correct. In Hindustan Steel Works Construction Ltd. v. State of Kerala [1998] 2 Comp CLJ 383, it was held that in spite of all the control of the Government, a government company is neither a government department nor a Government establishment, it is just an agency of the Government. Similarly, the employees of a Government Company are not the employees of the Central or State Government. Answer 5(a)(iii) Incorrect. Section 14 of the Companies Act provides that the memorandum of association should be in any one of the Forms specified in Tables B, C, D and E of Schedule I of the Companies Act, 1956, as may be applicable in relation to the type of company proposed to be incorporated or in a Form as near thereto as the circumstances admit. 11 EP–CL– December 2009 Answer 5(a)(iv) Incorrect. A director is an agent of the company and not of other members of the Board. Anything done by the Board cannot make a director liable who did not know that action and did not participate in it, even if he attends the subsequent meeting at which the minutes recording the wrongful action of the earlier meeting are confirmed. A director could not be liable for the misconduct of another director unless he has joined with him in the perpetration of the wrong or has omitted to thwart the wrong due to his negligence [Life Insurance Corporation v. Haridas Mundra (1966) 26 Com. Cases 371 (D.B)(All)]. In the absence of reasonable grounds for suspicion, a director cannot be held liable for the fraudulent acts of co-director on the ground that he ought to have discovered the fraud [Dovey v. Cory (1901) A.C.477]. Answer 5(a)(v) Incorrect. Only individuals who are applying/holding shares or debentures on their own behalf singly or jointly can make the nomination. In other words, non-individuals including society, trust, body corporate, partnership firms, Karta of Hindu Undivided Family, holder of power of attorney cannot nominate. Answer 5(b) A public company can be converted into a private company only after the approval of the Central Government. It cannot be treated as a private company till the Central Government accords its approval. Conversion of a public company into a private company will require: — Passing of a special resolution authorizing the conversion and altering the Articles so as to include the matters specified in section 3(1)(iii). — Changing the name of the company by special resolution as required by section 21. — Obtaining the approval of the Central Government as required by section 31. Proviso to section 31(1) provides that no alteration made in the Articles, which has the effect of converting a public company, shall have effect unless such alteration has been approved by the Central Government. — Filing of printed copy of the articles as altered within one month of the receipt of the approval of the Central Government with the Registrar of Companies. Therefore, Tuff Ltd. can be converted into a private company even after eighteen years of existence as a public company provided it complies with the procedure as mentioned above. Question 6 (a) The power to invest funds of the company is the prerogative of the Board of directors under section 292. Discuss the limitations on such powers of the Board, if any, relating to inter-corporate loans and investments under section 372A. (6 marks) EP–CL–December 2009 12 (b) With the approval of the Board, an amount of Rs.50 crore was spent by Speed Jet Ltd., in producing a commercial film, not covered under its objects clause. The film was a complete flop and the company lost an amount of Rs.40 crore. Some of the members of the company objected to such investments not covered by the objects clause of the company. They filed a suit in the court of law making the directors personally responsible and to make good the loss. Will they succeed ? Support your answer with reasons. (6 marks) (c) What is meant by ‘doctrine of ultra vires’ ? (4 marks) Answer 6(a) Subject to limitations under different sections of the Act and limitations under the Memorandum and Articles of Associations of the company, section 292 of the Companies Act, 1956 has given wide powers to the Board of Directors of a company to invest the funds of the company. Every resolution of the Board delegating the powers must specify the total amount up to which the funds of the company may be invested and the nature of the investment which may be made by the delegate under clause (d) of section 292(1).[Section 292(3)]. Moreover, the Board also has the power to make loans, borrow money etc. Board’s power under section 292 to make loans, give guarantee or provide security has been restricted under section 372A of the Act. As per Section 372A : No Company shall, directly or indirectly: (a) make any loan to any other body corporate; (b) give any guarantee, or provide security, in connection with a loan made by any other person to, or to any other person by, any body corporate; and (c) acquire, by way of subscription, purchase or otherwise the securities of any other body corporate; exceeding 60% of its paid-up share capital and free reserves, whichever is more. However, a company may make loan, give any guarantee or provide security and/or make investment in aggregate exceeding the aforesaid limits of 60% or 100% if the same is previously authorized by a special resolution passed in a general meeting. Answer 6(b) In the case of a company whatever is not stated in the memorandum as the objects or powers is prohibited by the doctrine of ultra vires. As a result, an act which is ultra vires is void, and does not bind the company. Neither the company nor the other contracting party can sue on it. Also, as stated earlier, the company cannot make it valid, even if every member assents to it. Further, it is one of the duties of directors to ensure that the corporate capital is used only for the legitimate business of the company and hence if such capital is diverted to purposes foreign to company’s memorandum, the director will be personally liable to replace it. In Jehangir R. Modi v. Shamji Ladha, [(1866-67) 4 Bom. HCR (1855)], the Bombay High Court held: “A shareholder can maintain an action against the directors to compel them to restore to the company the funds of the company that have by them 13 EP–CL– December 2009 been employed in transactions that they have no authority to enter into, without making the company a party to the suit”. In the present case, the company Speed Jet Ltd. invested an amount of Rs.50 crores in producing a commercial film not covered under the object clause of the company. The act of the company is ultra vires and the persons responsible for entering into the venture are personally responsible for the loss of the company. They are liable to make good the loss thereof to the company. The suit filed in the court is tenable. Answer 6(c) Doctrine of Ultra Vires The word ‘ultra’ means beyond and the word ‘vires’ means the powers. So, the meaning of the word ultra vires means beyond the power. In the case of a company whatever is not stated in the memorandum as the objects or powers is prohibited by the doctrine of ultra vires. As a result, an act which is ultra vires is void, and does not bind the company. Neither the company nor the other contracting party can sue on it. The company cannot make it valid, even if every member assents to it. The general rule is that an act which is ultra vires the company is incapable of ratification. An act which is intra vires the company but outside the authority of the directors may be ratified by the company in proper form [Rajendra Nath Dutta v. Shilendra Nath Mukherjee, (1982) 52 Comp. Cas. 293 (Cal.)]. The rule is meant to protect shareholders and the creditors of the company. But if the act is ultra vires (beyond the powers of) the directors only, the shareholders can ratify it. Or, if it is ultra vires the articles of association, the company can alter its articles in the proper way. Question 7 (a) What do you understand by ‘transmission of shares’ ? (2 marks) (b) Fortune Ltd. refused to enter the name of the minor son of a deceased member in the register of members on the ground that the minor cannot enter into a contract as per section 11 of the Indian Contract Act, 1872. The shares are fully paid-up. Comment on the decision of the company and suggest remedies available. (4 marks) (c) Piyush Ltd. decided to buy-back its shares with the approval of the Board of directors. As the Company Secretary of the company, advise the Board about the conditions and limitations in this regard. (10 marks) Answer 7(a) Transmission of shares – When a person dies, all his property vests at the moment of death in his legal representative. This is known as transmission or transfer by operation of law or involuntary assignment. Thus, transmission of shares takes place when the registered shareholder dies and shares in his name are transferred to his legal heir by operation of law. EP–CL–December 2009 14 Answer 7(b) A member who is not a sui juris e.g., a minor, is wholly incompetent to enter into a contract and as such cannot become a member of a company. Consequently, an agreement by a minor to take shares is void ab-initio. Also, in India, a minor is not competent to enter into any contract as per section 11 of the Indian Contract Act, 1872. However, in Diwan Singh v. Minerva Films Ltd. (1958) Comp. Cas 191, it was held that there is nothing in law to prevent minors acquiring or holding shares in a joint stock company if they are properly represented by lawful guardians. The minor is not subject to any obligation by holding paid up shares. The Company Law Board held that an agreement in writing for a minor to become a member may be signed on behalf of a minor, acting through his/her guardian, cannot be refused on the ground that the transferee is a minor, specially when the shares are fully paid up. In the present case, the shares are fully paid up. If the minor enter into a contract on behalf of a lawful guardian, Fortune Ltd. cannot refuse to enter the name of the minor son of deceased member. Answer 7(c) Note from Company Secretary to the Board Sub : Buy-back of Shares The Board of Directors has been considering buy-back of some shares of the company. The conditions and limitations in this regard are discussed below: (i) As per section 77A(1) of the Companies Act, 1956, a company can purchase its own shares, out of - (a) its free reserves, or (b) the securities premium account, or (c) the proceeds of any shares or other specified securities. Provided that no buy-back of any kind of shares or other specified securities shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities. (ii) The buy-back of shares or securities may be in any one or more of the following modes: (a) purchasing from existing security holders on a proportionate basis, (b) purchasing from open market, (c) purchasing from odd lot holders, (d) purchasing from securities issued to employees under scheme of stock option or sweat equity. (iii) The following are the conditions of buy-back: (a) the buy-back is authorized by its articles, 15 EP–CL– December 2009 (b) a special resolution has been passed in general meeting of the company authorizing the buy-back. (iv) However, the said special resolution shall not be required to be passed if the following conditions are satisfied: (a) the buy-back is or for less than 10% of the total paid up equity capital and free reserves of the company, and (b) a resolution authorizing the buy-back is passed at a meeting of the Board. Provided that no company can come out with a fresh proposal to buy back its shares within a period of 365 days from the date of the preceding offer of buy back. (v) the buy-back is or less than twenty-five per cent of the total paid-up capital and free reserves of the company: Provided that the buy-back of equity shares in any financial year shall not exceed twenty-five per cent of its total paid-up equity capital in that financial year; (vi) the ratio of the debt owed by the company is not more than twice the capital and its free reserves after such buy-back: Provided that the Central Government may prescribe a higher ratio of the debt than that specified under this clause for a class or classes of companies; (vii) all the shares or other specified securities for buy-back are fully paid-up; (viii) the buy-back of the shares or other specified securities listed on any recognised stock exchange is in accordance with the regulations made by the Securities and Exchange Board of India in this behalf; (ix) the buy-back in respect of shares or other specified securities other than those specified in (viii) above is in accordance with the guidelines as may be prescribed. (x) The buy-back operations should be completed within 12 months of the date of passing of the special resolution or a resolution passed by Board. Submitted for information and order. Sd/- Company Secretary Question 8 (a) Can a company registered under the Companies Act, 1956 commence business of banking in India ? Discuss. (4 marks) (b) Can a listed company change its name as and when necessary ? Give reasons in support of your answer. (4 marks) (c) Grace Ltd., a public limited company has received an application from Rosy for transmission of certain shares in her name. Rosy, being a widow of a shareholder, applies for transmission of the shares standing in the name of her deceased EP–CL–December 2009 16 husband without producing a succession certificate. Can the company transfer the shares of the deceased member ? Discuss. (4 marks) (d) Vayu Ltd. holds more than 50% of nominal value of the equity capital of Stream Ltd. In these circumstances, Stream Ltd. wants to become a member of Vayu Ltd. Can Stream Ltd. do so ? Discuss the rights of the said subsidiary in such a case. (4 marks) Answer 8(a) In India, banks may be set up either as a company incorporated under a Special Act of the Parliament, or as a company incorporated under the Companies Act, 1956. As per the RBI Act, 1934, it is mandatory for a bank to get itself registered with the RBI. For registration with the RBI, a company incorporated under the Companies Act, 1956 and desirous of commencing business of banking: (a) should have a initial minimum paid up capital of Rs.200 crores which is to be raised to Rs.300 crores within three years of commencement of business; and (b) the promoters’ contribution shall be a minimum of 40% of the paid up capital of the bank at any point of time. Answer 8(b) The name of a company can be changed by a special resolution and with the approval of the Central Government. Approval of the Central Government is not necessary if the change relates to the addition/ deletion of the word ‘private’ to the name. The powers of the Central Government to accord approval to the change of name, which were earlier delegated to the Regional Directors, have been delegated to the ROC w.e.f 1.7.1985 [vide Notification No. GSR 507 dated 24.6.1985]. All listed companies which decide to change their names shall be required to comply with the following conditions: — A time period of at least one year should have elapsed from the last name change. — At least 50% of its total revenue in the preceding one year period should have been accounted for by the new activity suggested by the new name. — The new name along with the old name shall be disclosed through the web sites of the respective stock exchange/s where the company is listed and also through the EDIFAR web site for a continuous period of one year, from the date of the last name change. (SEB1/MRD. Policy/ AT/Cir-20/2004 dated April 30, 2004). Answer 8(c) Articles of companies generally provide for formalities to be observed for transmission of shares. In the absence of such provision in the articles of the company, Regulations 25 to 28 of Table A of Schedule I to the Act will govern the procedure for transmission. According to these regulations, the legal representatives are entitled to the shares held by deceased member and the company must accept the evidence of succession e.g., a succession certificate or letter of administrations or probate or any other evidence properly required by the Board of directors. 17 EP–CL– December 2009 Accordingly, if a widow applies for transmission of the shares standing in the name of her deceased husband without producing a succession certificate and if the articles of association of the company so authorize, the directors of the company may dispense with the production of succession certificate, probate or letter of administration upon such terms as to indemnity as the directors may consider necessary. So, the directors may transmit the shares to the widow of the deceased by obtaining an indemnity bond. Therefore, Grace Ltd. can transfer the shares of the deceased member to Rosy. Answer 8(d) A company is a holding company of another if the other is its subsidiary. For this purpose, section 4 of the Companies Act, 1956 envisages the holding of more than 50% of nominal value of the equity capital of the other company. If the holding company holds more than half in nominal value of the subsidiary’s equity share capital, the relationship of holding company and subsidiary company subsists between them. Normally, a subsidiary company cannot be a member of the holding company. However, in case where it was a member before it became a subsidiary, it shall not have the voting right at a meeting, though it may exercise other rights of members (Section 42). EP-ELL – December 2009 18 ECONOMIC AND LABOUR LAWS Time allowed : 3 hours Maximum marks : 100 PART A (Answer Question No.1 which is compulsory and any three of the rest from this part.) Question 1
With reference to the relevant legal enactments, write short notes on any five of the following : (i) Export Promotion Council (ii) Combinations (iii) Advance authorisation scheme (iv) Calibration (v) Environmental audit (vi) Trade effluent (vii) Commercial purpose. (3 marks each) Answer 1(i) Export Promotion Council The basic objective of Export Promotion Council (EPC) is to promote and develop the exports of the country. Each EPC is responsible for the promotion of a particular group of products, projects and services. The major functions of the EPC are: — To provide commercially useful information and assistance to members in developing and increasing exports; — To offer professional advice to members in areas such as technology upgradation, quality and design improvement, standards and specifications, product development, innovation etc. — To organise visits of delegations of its members abroad to explore overseas market opportunities; — To organise participation in trade fairs, exhibitions and buyer-seller meets in India and abroad; — To promote interaction between the exporting community and the Government both at the Central and State level; and — To build a database on the exports and imports of the members. Answer 1(ii) Combination The term combination has been used under the Competition Act, 2002. It has been given broad coverage to include acquisition of control, shares, voting rights, assets, merger or amalgamation. The acquisition of one or more enterprises by one or more
18 19 EP-ELL – December 2009 person or merger or amalgamation of enterprises shall be a combination of such enterprises and persons or enterprises. The thresholds limits for combination are specified in the Competition Act, 2002 in terms of assets or turnover in India and abroad, if (a) any acquisition where — (i) the parties to the acquisition, being the acquirer and the enterprise, whose control, shares, voting rights or assets have been acquired or are being acquired jointly have, - (A) either, in India, the assets of the value of more than rupees one thousand crores or turnover more than rupees three thousand crores; or (B) in India or outside India, in aggregate, the assets of the value of more than five hundred million US dollars, including at least rupees five hundred crores in India or turnover more than fifteen hundred million US dollars, including at least rupees fifteen hundred crores in India; or (ii) the group, to which the enterprise whose control, shares, assets or voting rights have been acquired or are being acquired, would belong after the acquisition, jointly have or would jointly have, - (A) either in India, the assets of the value of more than rupees four thousand crores or turnover more than rupees twelve thousand crores; or (B) in India or outside India, in aggregate, the assets of the value of more than two billion US dollars, including at least rupees five hundred crores in India or turnover more than six billion US dollars, including at least rupees fifteen hundred crores in India; or (b) acquiring of control by a person over an enterprise when such person has already direct or indirect control over another enterprise engaged in production, distribution or trading of a similar or identical or substitutable goods or provision of a similar or identical or substitutable service, if - (i) the enterprise over which control has been acquired along with the enterprise over which the acquirer already has direct or indirect control jointly have, (A) either in India, the assets of the value of more than rupees one thousand crores or turnover more than rupees three thousand crores; or (B) in India or outside India, in aggregate, the assets of the value of more than five hundred million US dollars, including at least rupees five hundred crores in India or turnover more than fifteen hundred million US dollars, including at least rupees fifteen hundred crores in India; or (ii) the group, to which enterprise whose control has been acquired, or is being acquired would belong after the acquisition, jointly have would jointly have, (A) either in India, the assets of the value of more than rupees four thousand crores or turnover more than rupees twelve thousand crores; or EP-ELL – December 2009 20 (B) in India or outside India, in aggregate, the assets of the value of more than two billion US dollars, including at least rupees five hundred crores in India or turnover more than six billion US dollars including at least rupees fifteen hundred crores in India; or (c) any merger or amalgamation in which — (i) the enterprise remaining after merger or the enterprise created as a result of the amalgamation, as the case may be, have, - (A) either in India, the assets of the value of more than rupees one thousand crores or turnover more than rupees, three thousand crores; or (B) in India or outside India, in aggregate, the assets of the value of more than five hundred million US dollars, including at least rupees five hundred crores in India or turnover more than fifteen hundred million US dollars, including at least rupees fifteen hundred crores in India; or (ii) the group, to which the enterprise remaining after the merger or the enterprise created as a result of the amalgamation, would belong after the merger or the amalgamation, as the case may be, have or would have, - (A) either in India, the assets of the value or more than rupees four thousand crores or turnover more than rupees twelve thousand crores; or (B) in India or outside India, the assets of the value of more than two billion US dollars including at least rupees five hundred crores in India or turnover more than six billion US dollars, including at least rupees fifteen hundred crores in India. Section 6 of the Competition Act, 2002 prohibits any person or enterprise from entering into a combination which causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India and such combination would be void. In this context it may be noted that the Competition Act makes the notification of combination to Competition Commission of India mandatory. Answer 1(iii) Advance Authorisation Scheme An Advance Authorisation is issued to allow duty free import of inputs, which are physically incorporated in the export product (making normal allowance for wastage). In addition, fuel, oil, energy, catalysts etc. which are consumed/utilised in the course of their use to obtain the export product, may also be allowed under the scheme. However, the Director General of Foreign Trade, by means of Public Notice, may in public interest exclude any product(s) from the purview of advance Authorisation. Advance Authorisations are issued on the basis of the inputs and export items given under SION. However, they can also be issued on the basis of Adhoc norms or self declared norms. Advance Authorisation can be issued either to a manufacturer exporter or merchant exporter tied to supporting manufacturer(s) for import of inputs required in the manufacture of goods — (i) for Physical exports (including exports to SEZ); and/ or 21 EP-ELL – December 2009 (ii) for Intermediate supplies; and /or
(iii) to the main contractor for supply of goods to the specified categories under deemed export categories
(iv) supply of stores on board of the foreign going vessel/ aircraft subject to the condition that there is specific SION in respect of the item(s) supplied.
Answer 1(iv)
Calibration
According to section 2(a) of Standards of Weights and Measures Act, 1976, calibration means all the operations which are necessary for the purpose of determining the values of the errors of a weight or measure and, if necessary, to determine the other metrological properties of such weight or measure, and includes the actual fixing of the positions of the guage-marks or scale-marks of a weight or measure, or in some cases, of certain principal marks only, in relation to the corresponding values of the quantity to be measured.
The explanation to Section 2(a) clarifies that the calibration may also be carried out with a view to permitting the use of a weight or measure as a standard.
Answer 1(v)
Environmental Audit
Rule 14 of the Environment Protection Rules, 1986 provides for the submission of environmental audit report. Accordingly, every person carrying on an industry, operation or process requiring consent under Section 25 of the Water (Prevention and Control of Pollution) Act or Section 23 of the Air (Prevention and Control of Pollution) Act or both or authorisation under the Hazardous Wastes (Management and Handling) Rules, 1989 is required to submit an environmental audit report in Form V for the financial year ending on 31st March every year on or before the 15th of May, beginning 1993 to the concerned State Pollution Control Board.
Answer 1(vi)
Trade Effluent
As per Section 2(k) of the Water( Prevention and Control of Pollution) Act, 1974 Trade effluent includes any liquid, gaseous or solid substance which is discharged from any premises used for carrying on any industry, operation or process or treatment and disposal system, other than domestic sewage.
The State Pollution Control Boards have been empowered to give directions to any person, who in its opinion is abstracting water from any such stream or well in the area in quantities which are substantial in relation to the flow or volume of that stream or well or is discharging sewage or trade effluent into any such stream or well, to give such information as to the abstraction or discharge at such times and in such form as may be specified in the directions. EP-ELL – December 2009 22 Answer 1(vii) Commercial purpose The purchase of goods can be said to be for a ‘commercial purpose only if the goods have been purchased for being used in some profit making activity on a large-scale, and there is close and direct nexus between the purchase of goods and the profit-making activity. In Laxmi Engineering Works v. P.S.G. Industrial Institute, Supreme Court held that the explanation to Section 2(1)(d) of the Consumer Protection Act, 1986 is clarificatory in nature. It observed that whether the purpose for which a person has bought goods is a ‘commercial purpose’ is always a question of fact and to be decided in the facts and circumstances of each case. If the commercial use is by the purchaser himself for the purpose of earning his livelihood by means of self employment such purchaser of goods would yet be a consumer. The Supreme Court further observed that if a person purchased a machine to operate it himself for earning his livelihood, he would be a consumer. If such person took the assistance of one or two persons to assist him in operating the machine, he would still be a consumer. But if a person purchases a machine and appoint or engage another person exclusively to operate the machine, then such person would not be a consumer. Question 2 State, with reasons in brief, whether the following statements are true or false. Attempt any five : (i) A person can export or import without an importer-exporter code (IEC) number. (ii) The manufacture of a non-standard weight or measure is prohibited under the Standards of Weights and Measures Act, 1976. (iii) A reasonable opportunity of being heard must be afforded to a person before ordering confiscation of an essential commodity under the Essential Commodities Act, 1955. (iv) Trade practice includes a single or isolated action of any person in relation to any trade. (v) The Competition Act, 2002 does not prohibit dominance, but the abuse of dominant position. (vi) A trade mark may not distinguish the goods of one manufacturer or trader from similar goods of other manufacturers or traders. (3 marks each) Answer 2(i) False Reasons : The Foreign Trade Policy prohibits the export or import by any person without an Importer-Exporter Code (IEC) number unless specifically exempted. The IEC number is granted on an application, by the competent authority in accordance with the specified procedure. An application for grant of IEC number is required to be made in the prescribed form along with specified documents, by the Registered/Head Office of the applicant to the Regional authority under whose jurisdiction, the Registered office in case of company and Head office in case of others, falls. 23 EP-ELL – December 2009 Answer 2(ii) True Reasons : Manufacture of non-standard weights or measures is prohibited under Section 22 of the Standards of Weights and Measures Act, 1976. Section 22 of the Act provides that no weight or measure shall be made or manufactured unless it conforms to the standards of weights or measures established by or under the Act. The Central Government may permit making or manufacturing of any weights or measures not conforming to the standards, provided such weights or measures are manufactured exclusively for the purpose of any scientific investigation or research or for export and is made or manufactured under such conditions and restrictions as may be prescribed. Contravention of Section 22 is punishable under Section 52. Answer 2(iii) True Reasons : Before passing an order for confiscation under Section 6A, in terms of Sub-section (1) of Section 6B of the Essential Commodities Act, 1955 the owner of the essential commodity, package, covering, receptacle, animal, vehicle, vessel or other conveyance or the person from whom it is seized is required to be given a notice in writing informing him of the grounds on which it is proposed to confiscate the above goods to provide him an opportunity of making a representation in writing within a reasonable, time and give him a reasonable opportunity of being heard in the matter. Answer 2(iv) True Reasons : As per Section 2(u) of the MRTP Act, 1969 Trade Practice means any practice relating to the carrying on of any trade and includes— (i) anything done by any person which controls or affects the price charged by, or the method of trading of, any trader or any class of traders, (ii) a single or isolated action of any person in relation to any trade. Answer 2(v) True Reasons : Section 4 of the Competition Act, 2002 dealing with abuse of dominant position is one of the most important provisions of the Act. In terms of section 4, the Act does not prohibit mere possession of dominant position, but only its abuse, thus recognizing that a dominant position may have been achieved through superior economic performance. Section 4, therefore, only applies to abuse of a dominant position, and does not restricts enterprise from holding and maintaining a dominant position or striving to achieve the dominant position. As mentioned above, section 4 restrict an enterprise from abusing its dominant position. In considering whether there is or has been an abuse of dominance, the Competition Commission has been empowered to conduct a detailed inquiry of the relevant market EP-ELL – December 2009 24 concerned. Section 4(2) enumerates conditions/circumstances, the presence of which may render a dominant enterprise liable for abuse of its dominance. Answer 2(vi) False Reasons : A Trade Mark distinguishes the goods of one manufacturer or trader from similar goods of others and therefore, it seeks to protect the interest of the consumer as well as the trader. A trade mark may consist of a device depicting the picture of animals, human beings etc., words, letters, numerals, signatures or any combination thereof. Since a trade mark indicates relationship in the course of trade, between trader and goods, it serves as a useful medium of advertisement for the goods and their quality. The object of trademark law is to permit an enterprise by registering its trademark to obtain an exclusive right to use, share, or assign a mark. Section 29 of the Trade Marks Act, 1999 clearly states that a registered trade mark is infringed, if (a) the mark is identical and is used in respect of similar goods or services; or (b) the mark is similar to the registered trade mark and there is an identity or similarity of the goods or services covered by the trade mark; or (c) the trade mark is identical and is used in relation to identical goods or services; and that such use is likely to cause confusion on the part of the public or is likely to be taken to have an association with the registered trade mark. Question 3 (a) Distinguish between any two of the following : (i) ‘Certification trade marks’ and ‘collective trade marks’. (ii) ‘Duty free replenishment certificate’ and ‘duty entitlement passbook scheme’. (iii) ‘Provisional specification’ and ‘complete specification’ under the Patents Act, 1970. (5 marks each) (b) Re-write the following sentences after filling-in the blank spaces with appropriate word(s)/figure(s) : (i) The Consumer Disputes Redressal Forum shall not admit a complaint unless it is filed within ______years from the date on which the cause of action has arisen. (ii) Indian parties are prohibited from making investment in a foreign entity engaged in ______. (iii) The company which has exported goods is required to realise the full value of goods within ______days. (iv) For setting-up an EOU, three copies of the application in the prescribed form may be submitted to the ______. (v) The State Commission under the Consumer Protection Act, 1986 can entertain complaints where the value of the goods or services and the 25 EP-ELL – December 2009 compensation, if any, claimed exceeds Rs.______, but does not exceed Rs. ______. (1 mark each) Answer 3(i) Distinction between Certification Trade Marks and Collective Trade Marks Section 2(1)(e) of the trade Marks Act, 1999 defines the term certification trade mark as to mean a mark capable of distinguishing the goods or services in connection with which it is used in the course of trade which are certified by the proprietor of the mark in respect of origin, material, mode of manufacture of goods or performance of services, quality, accuracy or other characteristics from goods or services not so certified and registerable as such in respect of those goods or services in the name, as proprietor of the certification trade mark, of that person. Section 2g of the Trade Marks Act, 1999 defines the term collective marks means a trade mark distinguishing the goods or services of members of an association of person not being a partnership within the meaning of the Indian Partnership Act, 1932 which is the proprietor of the mark from those of others. Sections 69 to 78 deal with registration of certification trade mark. The purpose of certification trade mark is to show that the goods on which the mark is used have been certified by some competent person in respect of certain characteristics of the goods such as origin, mode of manufacture, quality, etc. The proprietor of a certification trade mark does not himself deal in the goods. A certification trade mark may be used in addition to the users own trade mark on his goods. Sections 61 to 68 contain provisions relating to the registration of Collective trade marks. These sections provide for registration of a collective mark which belongs to a group or association of persons and the use thereof is reserved for members of the group or association of persons. Collective marks serve to distinguish characteristic features of the products or services offered by those enterprises. It may be owned by an association which may not use the collective mark but whose members may use the same. The association ensures compliance of certain quality standards by its members, who may use the collective mark if they comply with the prescribed requirements concerning its use. The primary function of a collective mark is to indicate a trade connection with the Association or Organisation. Answer 3(ii) Distinction between Duty Free Replenishment Certificate and Duty Entitlement Passbook Scheme DFRC is issued to a merchant-exporter or manufacturer-exporter for the import of inputs used in the manufacture of goods without payment of basic customs duty. However, such inputs are subject to the payment of additional customs duty equal to the excise duty at the time of import. DFRC is issued on minimum value addition of 25% except for items in gems and jewellery sector for which prescribed value addition is applicable. The objective of Duty Entitlement Passbook Scheme (DEPB) is to neutralise the incidence of Customs duty on the import content of the export product. The neutralisation has been provided by way of grant of duty credit against the export product. EP-ELL – December 2009 26 DFRC may be issued in respect of exports for which payments are received in non- convertible currency. Such exports have, however, been made subject to value addition and prescribed conditions.
In fact, DFRC is issued only in respect of products covered under the Standard Input Output Norms (SION) as notified by DGFT. DFRC is issued for import of inputs as per SION as indicated in the shipping bills. The validity of such authorisation is 24 months.
The holder of DEPB has been given an option to pay additional customs duty, if any, in cash as well. The DEPB is valid for a period of 24 months from the date of issue. The DEPB and/or the items imported against it are freely transferable. The transfer of DEPB should however be for import at the port specified in the DEPB.
Normally, the exports made under the DEPB Scheme are not entitled for drawback. However, the additional customs duty/excise duty paid in cash or through debit under DEPB is adjusted as CENVAT Credit or Duty Drawback. Answer 3(iii) Distinction between Provisional Specification and Complete Specification A provisional specification is a document, which contains the description regarding the nature of an invention. The description however does not contain the details regarding the invention. Also it does not contain the claims. The provisional specification is filed to claim the priority date of an invention. The advantages of a provisional specification is that it can be filed as soon as the patent is conceived and for the recorded of priority date. But the application is only examined after the complete specification has been filed. Section 9 of the Patents Act, 1970 stipulates that where an application for a patent (not being a convention application or an application filed under PCT designating India) is accompanied by a provisional specification, a complete specification shall be filed within twelve months from the date of filing of the application, and if the complete specification is not so filed, the application shall be deemed to be abandoned. Complete specification is the document, which contains the detailed description of invention along with the drawings and claims. Also the description regarding prior art is included in the complete specification. Section 10 dealing with contents of Specifications provides that every specification, whether provisional or complete, shall describe the invention and begin with a title sufficiently indicating the subject matter to which the invention relates. Every complete specification is required to - (a) fully and particularly describe the invention and its operation or use and the method by which it is to be performed; (b) disclose the best method of performing the invention which is known to the applicant and for which he is entitled to claim protection; (c) end with a claim or claims defining the scope of the invention for which protection is claimed; and (d) be accompanied by an abstract to provide technical information on the invention. 27 EP-ELL – December 2009 Answer 3(b) (i) The Consumer Disputes Redressal Forum shall not admit a complaint unless it is filed within 2(two) years from the date on which the cause of action has arisen. (ii) Indian parties are prohibited from making investment in a foreign entity engaged in Real estate or banking business . (iii) The company which has exported goods is required to realise the full value of goods within 12 months / 365 days. (iv) For setting-up an EOU, three copies of the application in the prescribed form may be submitted to the Development Commissioner . (v) The State Commission under the Consumer Protection Act, 1986 can entertain complaints where the value of the goods or services and the compensation, if any, claimed exceeds Rs.Twenty lakh , but does not exceed Rs.one crore . Question 4 (a) With reference to the relevant provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder, advise on the following: (i) Naresh, an Indian citizen, is interested in sending Rs.10,000 to his sister residing in USA as birthday gift. (ii) A person resident outside India desires to contribute Rs.10 lakh as capital in a firm engaged in software business in India. (iii) An Indian company intends to open a foreign currency account in India as well as outside India. (iv) A company incorporated in USA desires to establish its manufacturing unit in special economic zone in India. (v) Dinesh, an Indian citizen, wants to use his international debit card for withdrawal of cash during his visit abroad. (1 mark each) (b) Enumerate the heads under which compensation for damages may be claimed from the National Environment Tribunal constituted under the National Environment Tribunal Act, 1995. (5 marks) (c) Do the following acts constitute infringement of copyright under the Copyright Act, 1957 : (i) Making or publishing of a painting, drawing, engraving or photograph of a work of architecture. (ii) Reproduction of a literary, dramatic, musical or artistic work in the form of a cinematograph film. (iii) Reconstruction of a building or structure in accordance with the architectural drawings or plans by reference to which the building or structure was originally constructed. (iv) Making of any sound recording or visual recording for the private use of the person making such recording, or solely for the purposes of bona fide teaching or research. (v) Making translation of a literary work. (1 mark each) EP-ELL – December 2009 28 Answer 4(a)(i) Rule 5 of Foreign Exchange Management (Current Account Transaction) Rules, 2000 requires prior approval of the Reserve Bank for gift remittances exceeding US$ 5,000 per remitter/donor per annum. Answer 4(a)(ii) Foreign Exchange Management (Investment in Firm, or Proprietary concern in India) Regulations, 2000 requires prior approval of Reserve Bank for investment by way of contribution to capital in firm engaged in software business. Answer 4(a)(iii) In terms of Foreign Exchange Management (Capital Account Transaction) Regulations, 2000 an Indian company can open a foreign currency account in India as well as outside India. Answer 4(a)(iv) Generally, a person resident outside India has been prohibited from establishing in India, without prior approval of the Reserve Bank, a branch or liaison office or any other place of business by whatever name called. However, a company incorporated outside India has been allowed to establish a manufacturing unit in Special Economic Zones in India, subject to condition that: — such units are functioning in those sectors where 100% FDI is permitted; — such units comply with part XI of the Companies Act, 1956 dealing with companies incorporated outside India (Section 592 to 602); — such units function on a stand-alone basis; — in the event of winding-up of business and for remittance of winding-up proceeds, the branch shall approach an Authorised Dealer in Foreign Exchange. In the light of the above legal position, a company incorporated in USA can establish its manufacturing unit in special economic zones in India.
Answer 4(a)(v)
Rule 7 Foreign Exchange Management (Current Account Transaction) Rule, 2000 provides that International Debit Cards can be used by a resident for drawing cash or making payment to a merchant establishment overseas during his visit abroad for permissible current account transactions and item wise limits as mentioned in the schedules shall be applicable to payment made through use of these cards. Therefore, Dinesh can use his international debit card for withdrawal of cash during his visit abroad, subject to item wise prescribed limits. Answer 4(b) The Schedule to the National Environment Tribunal Act, 1995 lists out the following heads under which compensation for damages may be claimed: (a) Death; 29 EP-ELL – December 2009 (b) Permanent, temporary, total or partial disability or other injury or sickness; (c) Loss of wages due to total or partial disability or permanent or temporary disability; (d) Medical expenses incurred for treatment of injuries or sickness; (e) Damage to private property; (f) Expenses incurred by the Government or any local authority in providing relief, aid and rehabilitation to the affected persons; (g) Expenses incurred by Government for any administrative or legal action or to cope with any harm or damage, including compensation for environmental degradation and restoration of the quality of environment; (h) Loss to Government or local authority arising out of, or connected with, the activity causing any damage; (i) Claims on account of any harm, damage or destruction to the fauna including milch and draught animals and aquatic fauna; (j) Claims on account of any harm, damage or destruction to the flora including aquatic flora, crops, vegetables, trees and orchards; (k) Claim including cost of restoration on account of any harm or damage to environment including pollution of soil, air, water, land and eco-system; (l) Loss and destruction of any property other than private property; (m) Loss of business or employment or both; (n) Any other claim arising out of or connected with, any activity of handling of hazardous substance. Answer 4(c)(i) Making or publishing of a painting, drawing, engraving or photograph of a work of architecture does not constitute infringement of copyright under section 52 of the Copyright Act, 1957. Answer 4(c)(ii) Reproduction of a literary, dramatic, musical or artistic work in the form of a cinematographic film constitute infringement of copyright under Copyright Act, 1957. Answer 4(c)(iii) Reconstruction of a building or structure in accordance with the architectural drawings or plans by reference to which the building or structure was originally constructed does not constitute infringement of copyright under section 52 of the Copyright Act, 1957. Answer 4(c)(iv) Making of any sound recording or visual recording for the private use of the person making such recording, or solely for the purpose of bona fide teaching or research does not constitute infringement of copyright under section 52 of the Copyright Act, 1957. EP-ELL – December 2009 30 Answer 4(c)(v) Making translation of a literary work constitute infringement of copyright under Copyright Act, 1957. Question 5 (a) Raman purchased a car by taking a loan from a bank and gave post-dated cheques to the bank not only in respect of repayment of loan instalments but also towards premium of insurance policy for succeeding 3 years. On the expiry of the policy in the first year, the bank failed to get the policy renewed for the second year. In the meantime, the car met with an accident. Raman brought an action against the bank for ‘deficiency in service’ under the Consumer Protection Act, 1986. Will he succeed ? (5 marks) (b) What is the objective of ‘know your customer’ (KYC) guidelines ? When do the KYC guidelines apply ? (5 marks) (c) Mention the provisions of the Essential Commodities Act, 1955 regarding confiscation of essential commodities seized in contravention of section 3 of the Act. (5 marks)
Answer 5(a)
Raman will not succeed. The facts of the case are similar to the case of Pradeep Kumar Jain v. Citi Bank [1999(g) SCALE 662]. The Supreme Court held that there is no deficiency in service because the obligation to renew the policy was on the appellant alone. But merely passing on two cheques to the bank for being paid to the insurance company the appellant would not absolve himself of his liability to renew the policy. The appellant also have certain duties to discharge in the matter of obtaining the policy and can not merely pass the blame to someone else. Answer 5(b) The objective of KYC guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering activities. KYC procedures also enable banks to know/understand their customers and their financial dealings better which in turn help them manage their risks prudently. Banks are required to frame their KYC policies incorporating the following four key elements: — Customer Acceptance Policy; — Customer Identification Procedures; — Monitoring of Transactions; and — Risk management. KYC guidelines applies at the following stages: — Opening a new account. — Opening a subsequent account where documents as per current KYC standards not been submitted while opening the initial account. — Opening a Locker Facility where these documents are not available with the bank for all the Locker facility holders. 31 EP-ELL – December 2009 Answer 5(c) Section 6A of Essential Commodities Act, 1955 provides that where any essential commodity is seized in pursuance of an order made under Section 3, a report of such seizure shall be made, without any unreasonable delay, to the collector of the district or the Presidency town in which such essential commodity is seized. The Collector at his discretion, may direct for the production of the seized commodity before him and if he is satisfied that there has been contravention of the order he may pass order for confiscation of (a) the essential commodity so seized, (b) any package, covering or receptacle in which such essential commodity is found, and (c) any animal, vehicle, vessel or other conveyance used in carrying such essential commodity. Provided that without prejudice to any action which may be taken under any other provision of this Act, no foodgrains or edible oilseeds seized in pursuance of an order made under Section 3 in relation thereto from a producer shall, if the seized foodgrains or edible oilseeds have been produced by him, be confiscated under this section. Provided further that in the case of any animal, vehicle, vessel or other conveyance the owner of such animal, vehicle etc., shall be given an option to pay in lieu of its confiscation, a fine not exceeding the market price at the date of seizure of the essential commodity sought to be carried by such animal, vehicle, vessel, or other conveyance. PART B (Answer ANY TWO questions from this part.) Question 6 Write notes on any four of the following : (i) ‘Concept of continuous service for the payment of gratuity’ under the Payment of Gratuity Act, 1972. (ii) ‘Manner of fixation and revision of minimum wages’ under the Minimum Wages Act, 1948. (iii) ‘Authorities for the investigation and settlement of industrial disputes’ under the Industrial Disputes Act, 1947. (iv) ‘Hazardous process’ under the Factories Act, 1948. (v) ‘Benefits to which insured persons are entitled’ under the Employees’ State Insurance Act, 1948. (vi) ‘Payment of subsistence allowance’ under the Industrial Employment (Standing Orders) Act, 1946. (5 marks each) Answer 6(i) Concept of continuous service Section 2(c) of the Payment of Gratuity Act, 1972 defining continuous service says “continuous service” means continuous service as defined under section 2A. EP-ELL – December 2009 32 According to Section 2A, of the Payment of Gratuity Act, 1972 (1) An employee shall be said to be in continuous service for a period if he has, for that period been in un-interrupted service, including service which may be interrupted on account of (a) sickness, (b) accident, (c) leave, (d) absence from duty without leave (not being absence in respect of which an order treating the absence as break in service has been passed in accordance with the standing orders, rules or regulations governing the employees of the establishment), (e) layoff, (f) strike or (g) a lock-out or (h) cessation of work not due to any fault of the employee. It makes no difference whether such uninterrupted or interrupted service was rendered before or after the commencement of this Act; (2) Where an employee (not being an employee employed in a seasonal establishment) is not in continuous service for any period of one year or six months, he shall be deemed to be in continuous service under the employer: (a) for the said period of 1 year, if the employee during the period of twelve calendar months preceding the date with reference to which calculation is to be made, has actually worked under the employer for not less than: (i) 190 days in the case of an employee employed below the ground in a mine or in an establishment which works for less than six days in a week; and (ii) 240 days in any other case; (b) for determining the continuous service for the said period of six months for the payment of gratuity, the number of days the employee should have actually worked should be half the number of days actually worked which constitute continuous service for a period of 1 year, i.e., 95 days and 120 days respectively. For the above purpose of clause (2), the number of days on which an employee has actually worked under an employer shall include the days on which: (i) he has been laid-off under an agreement or as permitted by standing orders made under the Industrial Employment (Standing Orders) Act, 1946; or under the Industrial Disputes Act,1947;or under any other law applicable to the establishment; (ii) he has been on leave with full wages, earned in the previous year; 33 EP-ELL – December 2009 (iii) he has been absent due to temporary disablement caused by accident arising out of and in the course of his employment; and (iv) in the case of a female, she has been on maternity leave; so however, that the total period of such maternity leave does not exceed twelve weeks. (3) Where an employee, employed in a seasonal establishment, is not in continues service within the meaning of clause (1) for any period of 1 year or 6 months, he shall be deemed to be in continuous service under the employer for such period if he has actually worked for not less than 75 per cent, of the number of days on which the establishment was in operation during such period. Answer 6(ii) Manner of fixation and revision of minimum wages Section 3 of the Minimum Wages Act, 1948 dealing with fixing of minimum wages provides the manner of fixation and revision of minimum wages. According to Section 3(2), the ‘appropriate Government’ may fix minimum rate of wages for: (a) time work, (referred to as “a minimum time rate”); (b) piece work,( referred to as “a minimum piece rate”); (c) a “guaranteed time rate” for those employed in piece work for the purpose of securing to such employees a minimum rate of wages on a time work basis; (This is intended to meet a situation where operation of minimum piece rates fixed by the appropriate Government may result in a worker earning less than the minimum wage), and (d) a “over time rate” i.e. minimum rate whether a time rate or a piece rate to apply in substitution for the minimum rate which would otherwise be applicable in respect of overtime work done by employee. Section 3(3) of the Act provides that in fixing or revising minimum rates of wages, different minimum rates of wages may be fixed for – (i) different scheduled employments; (ii) different classes of work in the same scheduled employments; (iii) adults, adolescents, children and apprentices; (iv) different localities. Further, minimum rates of wages may be fixed by any one or more of the following wage periods, namely: (i) by the hour, (ii) by the day, (iii) by the month, or (iv) by such other large wage-periods as may be prescribed; EP-ELL – December 2009 34 Where such rates are fixed by the day or by the month, the manner of calculating wages for a month or for a day as the case may be, may be indicated. However, where wage period has been fixed in accordance with the Payment of Wages Act, 1936 vide Section 4 thereof; minimum wages shall be fixed in accordance therewith. Answer 6(iii) Authorities for Investigation and settlement of industrial disputes The Industrial Disputes Act, 1947 provides for following Authorities for Investigation and settlement of industrial disputes: (i) Works Committee. (ii) Conciliation Officers. (iii) Boards of Conciliation. (iv) Court of Inquiry. (v) Labour Tribunals. (vi) Industrial Tribunals. (vii) National Tribunals (i) Works Committee : The appropriate Government may by general or special order require the employer to constitute in the prescribed manner a Works Committee in industrial establishments, where 100 or more workmen are employed or have been employed on any working day in the preceding 12 months. The Works Committee will be comprised of the representatives of employers and workmen engaged in the establishment. It shall be the duty of the Works Committee to promote measures for securing and preserving amity and good relations between the employer and workmen and, to that end, to comment upon matters of their common interest or concern and endeavour to compose any material difference of opinion in respect of such matters. (ii) Conciliation Officers : The Act provides for appointment of ‘Conciliation Officers’, by appropriate Government, charged with the duty of mediating in and promoting the settlement of industrial disputes. The conciliation officer may be appointed for a specified area, or for specified industries in a specified area, or for one or more specified industries, either permanently or for a limited period. It is the duty of these officers to bring both the employees and employers together and help them to resolve their differences. If the dispute is settled, the conciliation officer shall send a report, to that effect, to the appropriate Government. (iii) Boards of Conciliation : For promoting the settlement of an industrial dispute, the appropriate Government may, as occasion arises, constitute a Board of Conciliation which shall consist of a Chairman and two or four other members as the appropriate Government thinks fit. The Chairman shall be an independent person and the other members shall be persons appointed in equal numbers to represent the parties to the dispute. Where a dispute has been referred to a 35 EP-ELL – December 2009 Board, it shall, without delay, investigate the dispute and do all such things as it thinks fit for the purpose of inducing the parties to come to a fair and amicable settlement of the dispute.
(iv) Courts of Inquiry : The appropriate Government may, as occasion arises, also constitute a ‘Court of Inquiry’ to inquire into any matter appearing to be connected with or relevant to an industrial dispute. It shall, thereafter, report about it to the Government ordinarily within a period of six months from the commencement of its inquiry. Such a court may consist of one independent person or of such number of independent persons as the appropriate Government may think fit and where it consists of two or more members, one of them shall be appointed as the Chairman.
(v) Labour Courts : The appropriate Government may constitute one or more ‘Labour Courts’ to adjudicate industrial disputes relating to any matter specified in the second schedule like issues related to standing orders, discharge or dismissal of workers, illegality or otherwise of strikes and lockouts, withdrawal of any customary benefit,etc. and to perform such other functions as may be assigned to them under the Act. A labour court shall consist of one person only to be appointed by the appropriate Government.
(vi) Tribunals : The appropriate Government may constitute one or more ‘Industrial Tribunals’ to adjudicate industrial disputes relating to any matter, whether specified in the second schedule or third schedule, and to perform such other functions as may be assigned to them under the Act. The third schedule covers the matters such as wages, bonus, allowances and certain other benefits, certain working conditions, discipline, rationalisation, retrenchment and closure of establishment. A tribunal shall consist of one person only to be appointed by the appropriate Government. The duties of Industrial Tribunal are identical with the duties of Labour Court, i.e., on a reference of any industrial dispute, the Tribunal shall hold its proceedings expeditiously and submit its award to the appropriate Government.
(vii) National Tribunals : The Central Government may, by notification in the Official Gazette, constitute one or more ‘National Industrial Tribunals’ to adjudicate an industrial dispute which, in the opinion of the Central Government, involve questions of national importance or are of such a nature that industrial establishments situated in more than one State are likely to be interested in, or affected by, such disputes. Such a tribunal shall consist of one person only to be appointed by the Central Government. When a matter has been referred to a National Tribunal, it must adjudicate the dispute expeditiously and submit its award to the Central Government.
Answer 6(iv)
Hazardous Process
Hazardous process has been defined under Section 2(cb) of the Factories Act, 1948 as follows:
“Hazardous process” means any process or activity in relation to an industry specified EP-ELL – December 2009 36 in the First Schedule where, unless special care is taken, raw materials used therein or the intermediate or finished products, bye products, wastes or effluents thereof would (i) cause material impairment to the health of the persons engaged in or connected therewith, or (ii) result in the pollution of the general environment; The State Government may, by notification in the Official Gazette amend the First Schedule by way of addition, omission or variation of any industry specified in the said Schedule. Answer 6(v) Benefits under E.S.I. Act, 1948 The E.S.I. Act, 1948 under Section 46 provides for 6 types of benefits to which the insured persons, their dependants are entitled. These benefits are as follows: (a) periodical payments in case of sickness certified by medical practitioner; (Sickness benefit) (b) periodical payments to an insured workman in case of confinement or miscarriage or sickness arising out of pregnancy, confinement; (Maternity beniit) (c) periodical payment to an insured person suffering from disablement as a result of employment injury; (Disablement benefit) (d) periodical payment to dependants of insured person; (Dependants’ benefit) (e) medical treatment and attendance on insured person; (Medical benefit) (f) payment of funeral expenses on the death of insured person at the prescribed rate of Rs. 1,500/-. (Funeral expenses) All these benefits except the medical benefit are monetary benefits. The rules regarding these benefits are contained in Sections 46 to 58 and Rules 55 to 58. Right to receive benefits is not transferable or assignable. When a person receives benefits under this Act, he is not entitled to receive benefits under any other enactment. An insured person is not entitled to receive for the same period more than one benefit, e.g. benefit of sickness cannot be combined with benefit of maternity or disablement, etc. Answer 6(vi) Payment of Subsistence Allowance Statutory provision for payment of subsistence allowance has been made under Section 10A of the Industrial Employment (Standing Orders) Act, 1946. As per Section 10A of the Act, on suspension, a workmen is entitled to subsistence allowance @ 50 per cent of his last drawn wages prior to suspension for the first 90 days of suspension and @ 75 % of such wages for the remaining period of suspension if the delay in completion of disciplinary proceedings against such workmen is not directly attributable to the conduct of such workman. If any dispute arises regarding the subsistence allowance payable to a workman, 37 EP-ELL – December 2009 the workman or the employer concerned may refer the dispute to the Labour Court constituted under the Industrial Disputes Act, 1947. Question 7 (a) Distinguish between any two of the following : (i) ‘Partial forfeiture of gratuity’ and ‘total forfeiture of gratuity’ under the Payment of Gratuity Act, 1972. (ii) ‘Model standing orders’ and ‘certified standing orders’ under the Industrial Employment (Standing Orders) Act, 1946. (iii) ‘Arising out of employment’ and ‘arising in the course of employment’ under the Workmen’s Compensation Act, 1923. (5 marks each) (b) Re-write the following sentences after filling-in the blank spaces with appropriate word(s)/figure(s) : (i) Bonus must be paid to employees within a period of ______months from the close of the accounting year. (ii) ______means termination of the services of a workman by the employer for any reason whatsoever, otherwise than as a punishment inflicted by way of disciplinary action. (iii) A minimum of ______contributory service is required for entitlement to pension under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. (iv) The employer is not liable for compensation when injury to the workman does not result in disablement for a period exceeding ______days. (v) The employer is required to send a report to the Commissioner for workmen’s compensation within ______days of the death or serious injury of the workman. (1 mark each) (c) Choose the most appropriate answer from the given options in respect of the following : (i) The ‘occupier’ of a factory is required to appoint a Welfare Officer where — (a) 250 workers are employed (b) 100 workers are employed (c) 200 workers are employed (d) 500 or more workers are employed. (ii) Out of the following which is not a manufacturing process — (a) Finished goods and packing thereof (b) The making of bidis (c) Stitching old gunny bags and making them fit for use (d) Pumping of water from a tubewell. (iii) From the date on which the Industrial Employment (Standing Orders) Act, 1946 becomes applicable to an industrial establishment, an employer is required to submit to the Certifying Officer the draft standing orders — (a) Within 3 months EP-ELL – December 2009 38 (b) Within 6 months (c) Within a month (d) Immediately on receipt. (iv) The Contract Labour (Regulation and Abolition) Act, 1970 applies to every establishment wherein workmen employed on any day of the preceding 12 months are — (a) 100 or more (b) 50 or more (c) 20 or more (d) 200 or more. (v) The maximum amount of gratuity payable under the Payment of Gratuity Act, 1972 is — (a) Rs. 5,00,000 (b) Rs. 3,50,000 (c) Rs. 2,50,000 (d) Rs. 2,00,000. (1 mark each)
Answer 7(a)(i) Partial forfeiture of gratuity & total forfeiture of gratuity Section 4(6)(a) of the Payment of Gratuity Act, 1972 provides that the gratuity of an employee whose services have been terminated for any act, willful omission or negligence causing any damage or loss to, or destruction of, property belonging to the employer, shall be forfeited to the extent of the damage or loss so caused. The right of forfeiture is limited to the extent of damage or loss caused. Section 4(6)(b) deals with a case where the services of an employee have been terminated: (a) for riotous and disorderly conduct or any other act of violence on his part, or (b) for any act which constitutes an offence involving moral turpitude provided that such 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. It has been held in the case of Bharat Gold Mines Ltd. v. Regional Labour Commissioner (Central), (1987) 70 FJR 11 (Karn) that when an offence of theft under law involves moral turpitude, gratuity stands wholly forfeited in view of section 4(6) of the Act. Answer 7(a)(ii) Model standing orders and certified 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. Within 6 months from the date on which the Act becomes applicable to an industrial 39 EP-ELL – December 2009 establishment, the employer is required to frame draft ‘standing orders’ and submit them to the Certifying Officer for certification. The draft should coverall the matters specified in the Schedule to the Act and any other matter that Government may prescribe by rules. The Certifying Officer after following the procedure laid down for certification of standing orders under the Act will certify the standing orders. 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 Act becomes applicable to an industrial establishment and ending with the date on which the Standing 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 Answer 7(a)(iii) Arising out of employment and in the course of employment To make the employer liable for compensation it is necessary that the injury is caused by an accident which must be raised out of and in the course of employment. Arising out of employment : The expression “arising out of employment” suggests some causal connection between the employment and the accidental injury. The cause contemplated is the proximate cause and not any remote cause. In the case of Mackenzie v. I.M. Issak, it was observed that the words "arising out of employment" means that injury has resulted from risk incidental to the duties of the service which unless engaged in the duty owing to the master, it is reasonable to believe that the workman would not otherwise have suffered. There must be a casual relationship between the accident and the employment. Arising in the course of employment : The expression “in the course of employment” suggests the period of employment and the place of work. In other words, the workman, at the time of accident must have been employed in the performance of his duties and the accident took place at or about the place where he was performing his duties. Answer 7(b) (i) Bonus must be paid to employees within a period of 8 months from the close of the accounting year.
(ii) Retrenchment means termination of the services of a workman by the employer for any reason whatsoever, otherwise than as a punishment inflicted by way of disciplinary action.
(iii) A minimum of 10 years contributory service is required for entitlement to pension under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952.
(iv) The employer is not liable for compensation when injury to the workman does not result in disablement for a period exceeding 3 days.
(v) The employer is required to send a report to the Commissioner for workmen’s compensation within 7 days of the death or serious injury of the workman. EP-ELL – December 2009 40 Answer 7(c)(i) (d) 500 or more workers are employed Answer 7(c)(ii) (a) Finished goods and packing thereof Answer 7(c)(iii) (b) Within 6 months Answer 7(c)(iv) (c) 20 or more Answer 7(c)(v) (b) 3,50,000 Question 8 Attempt any five of the following stating relevant legal provisions and decided case law, if any : (i) Mohan was in occupation of a residential quarters allotted to him by his employer. On his retirement on superannuation, he failed to vacate the quarters. His employer withheld the gratuity payable to him insisting that he should vacate the quarters first. Mohan approached the controlling authority claiming gratuity. Will he succeed ? (ii) Raju has been employed by Fancy Bazar as a part-time sweeper to clean the floors twice during the day. The provident fund inspector visited the establishment and raised objections for non-inclusion of his name in the muster roll and not paying provident fund contributions. Is the view held by the inspector valid ? (iii) Designers Ltd. is engaged in fabrication work of window grills with the aid of power and has employed 19 workers. Recently, it appointed 2 gardeners for gardening in its factory premises. Is the company liable to extend the benefits to the gardeners as applicable to other factory workers ? (iv) The workmen went on sympathetic strike by absenting themselves from work in support of the workmen belonging to some other employer. The management intends to take disciplinary action against those workmen. Is the intention of the management justified and legal ? (v) Efficiency Ltd. is in the process of reorganising its business. It is likely to result in some labour being rendered surplus. It has proposed retrenchment of economic dead weight. Can the company do so ? (vi) Jugal, a railways employee was ordered to travel to certain station and repair a pipeline there. After finishing the work, Jugal was hurrying across the platform when he slipped and fell and died as a result of the fall. Is the employer liable to pay compensation under the Workmen’s Compensation Act, 1923 ? (vii) An employee was dismissed from service for an act of misconduct. The company 41 EP-ELL – December 2009 did not pay any bonus to the dismissed employee for the accounting year in which the dismissal took place. Is the action of the company justified ? (4 marks each) Answer 8(i) Mohan will succeed. Withholding of gratuity is not permissible under any circumstance other than those enumerated in Section 4(6) of the Payment of Gratuity Act, 1972. Section 4(6) of the Payment of Gratuity Act says: (a) the gratuity of an employee, whose services have been terminated for any act, willful omission or negligence causing any damage or loss to, or destruction of, property belonging to the employer’ shall be forfeited to the extent of damage or loss so caused; (b) the gratuity payable to an employee may be wholly or partially forfeited- (i) if the services of such employee have been terminated for his riotous or disorderly conduct or any other act of violence on his part, or (ii) if the services of such employee have been terminated for any act which constitutes an offence involving moral turpitude, provided that such offence is committed by him in the course of his employment. Gratuity cannot be withheld for non vacation of service quarters by relieving employees. (Air India v. Authority under the Act, 1999 CLA 34 Bom.66) Answer 8(ii) The view held by the Inspector is valid. It has been held that the definition of “employee”, in Section 2(f) of the Employees' Provident Funds Act includes a part-time employee, who is engaged for any work in the establishment, a sweeper working twice or thrice in a week, a night watchman keeping watch on the shops in the locality, a gardener working for ten days in a month, etc. (Railway Employees Co-operative Banking Society Ltd. v. Union of India, 1980 Lab. IC 1212). Answer 8(iii) In Union of India v. G.M. Kokil, 1984 SCC (L&S) 631 it has been held that all persons employed in or in connection with a factory whether or not employed as workers are entitled to the benefits of the Factories Act, 1948. Hence the gardeners appointed for gardening in its factory premises are entitled to the benefits as applicable to other factory workers. Answer 8(iv) A sympathetic strike is an unjustifiable invasion of the right of employer who is not at all involved in the dispute. The management can take disciplinary action for the absence of workmen. However, in Ramalingam v. Indian Metallurgical Corporation, Madras, 1964-I L.L.J. 81, it was held that such cessation of work will not amount to a strike since there is no intention to use the strike against the management. Answer 8(v) In Parry & Co. Ltd. v. P.C. Pal (1970) II LLJ 429 the Supreme Court has observed that the management has a right to determine the volume of its labour force consistent EP-ELL – December 2009 42 with its business or anticipated business and its organisation. If for instance, a scheme of reorganisation of the business of the employer results in surplusage of employees, no employer is expected to carry the burden of such economic dead weight and retrenchment has to be accepted as inevitable, however, unfortunate it be. The fact that the implementation of a reorganisation scheme adopted by an employer for reasons of economy and convenience would lead to the discharge of some of the employees, will have no material bearing on the question as to whether the reorganisation has been adopted by the employer bona fide or not. In the light of the above observations of the Supreme Court, the company can do so. Answer 8(vi) The employer is liable to pay compensation to the workman. Under the Workmen’s Compensation Act, 1923 an employer is liable to pay compensation only if the injury is caused to a workman by an accident arising out of and in the course of his employment. The facts of the given problem are almost similar to the case namely Works Manager, Carriage & Wagon Shop v. Mahabir, (1954-55) F.J.R. 354 where a railway employee was ordered to travel to a certain station to repair a water main. When he had finished the work and was crossing the platform to catch the train, he slipped and died as a result. It was held that the death arose out of and in the course of employment and the employer is liable to pay compensation to the workmen. Answer 8(vii) The action of the company is justified. In Pandian Roadways Corpn. Ltd. v. Presiding Officer, Principal Labour Court, (1996) 2 LLJ 606, it has been held that if an employee is dismissed from service for any act of misconduct enumerated in Section 9 of the Payment of Bonus Act he stands disqualified from receiving any bonus under the Act, and not the bonus only for the accounting year in which the dismissal takes place. 43 EP–SLC – December 2009 SECURITIES LAWS AND COMPLIANCES
Time allowed : 3 hours Maximum marks : 100 PART A (Answer Question No. 1 which is COMPULSORY and any three of the rest from this part) Question 1 (a) State, with reasons in brief, whether the following statements are true or false : (i) Cumulative convertible preference shares are not hybrid instruments. (ii) Equity linked saving schemes have lock-in-period of five years. (iii) A depository is an organisation like Reserve Bank of India. (iv) In basket trading system, investor buys or sells all the fifty scrips in one go. (v) Hedge funds employ their funds for speculative trading. (2 marks each) (b) Re-write the following sentences after filling-in the blank spaces with appropriate word(s)/figure(s) : (i) Direct and indirect control of virtually all aspects of securities trading is provided by ______. (ii) Tracking stock is a type of common stock that 'tracks' depending on ______. (iii) CAMEL model encompasses ______. (iv) As per SEBI regulations, capital adequacy requirement for merchant banker shall be a net-worth of not less than Rs. ______. (v) ______are imposed on the scrip which witness abnormal price/volume movements. (1 mark each) Answer 1(a)(i) False Hybrid instruments are those which are created by combining the features of equity with bond, preference, and equity etc. As cumulative convertible preference shares have features of both equity and preference share capital, these are hybrid instruments. Answer 1(a)(ii) False Equity linked saving schemes have a lock in period of 3 years under Income-tax Act. Answer 1(a)(iii) True A Depository is an organization like a Central Bank where the securities of a shareholder are held in the electronic form at the request of the shareholder through the 43 EP–SLC – December 2009 44 medium of a Depository Participant. In both the systems, the transfer of funds or securities happens without the actual handling of funds or securities. Both the Banks and the Depository are accountable for the safe keeping of funds and securities respectively. Answer 1(a)(iv) False In this system the investors through the member brokers of the exchange are able to buy or sell all 30 scrips of sensex in one go in the proportion of their respective weights in the sensex. The investors can also create their own baskets by deleting certain scrips from 30 scrips in the sensex. Answer 1(a)(v) True Hedge funds employ their funds for speculative trading where they buy shares whose prices are likely to rise and sell shares whose prices are likely to dip. Answer 1(b) (i) Direct and indirect control of virtually all aspects of securities trading is provided by Securities Contract (Regulation) Act, 1956 . (ii) Tracking stock is a type of common stock that 'tracks' depending on financial performance of a specific business unit or operating division . (iii) CAMEL model encompasses Capital adequacy, Asset quality, Management Earning & Liquidity . (iv) As per SEBI regulations, capital adequacy requirement for merchant banker shall be a net-worth of not less than Rs. 5 Crores . (v) Special Margins are imposed on the scrip which witness abnormal price/volume movements. Question 2 (a) Write short notes on the following : (i) Corporate restructuring (ii) Trade to trade (iii) Margin trading (iv) Securities Appellate Tribunal. (2 marks each) (b) Expand the following abbreviations: (i) DVP (ii) EDIFAR (iii) OMO. (1 mark each) (c) What are the 'real estate mutual fund' schemes ? Explain their features. (4 marks) 45 EP–SLC – December 2009 Answer 2(a)(i) Corporate Restructuring Corporate Restructuring is a comprehensive process, by which a company can consolidate its business operations and strengthen its position for achieving its short- term and long-term corporate objectives. The restructuring could be undertaken by any entity or business unit, whether it is run as a sole proprietorship or partnership or society or in any other form of organization. Answer 2(a)(ii) Trade to Trade If a scrip is shifted on a Trade-to-trade settlement basis, selling/buying of shares in that scrip would result into giving/taking delivery of shares at the gross level and no intra day settlement/netting off/ square off facility would be permitted. The scrips which form part of ‘Z group’ are compulsorily settled on a trade to trade settlement basis. In addition to that surveillance department transfer various scrips from time to time on a trade to trade basis to contain the excessive volatility and/or abnormal volumes in the scrip. Answer 2(a)(iii) Margin Trading In order to enable the investors to take exposure in the market over and above the limit through their own resources, a leveraging mechanism of trading through borrowed funds has been introduced, which is called Margin Trading Facility. Margin Trading was introduced by SEBI to curb speculative dealings in shares leading to volatility in the prices of securities. Answer 2(a)(iv) Securities Appellate Tribunal
The Central Government may, by notification establish an appellate tribunal known as Securities Appellate Tribunal (SAT) to exercise the jurisdiction, powers and authority conferred on such tribunal under the SEBI Act, 1992. The Central Government has set up a Tribunal at Mumbai. Any person aggrieved by the order to the SEBI may refer an appeal to a Securities Appellate Tribunal having jurisdiction in the matter. The SAT is not bound by the Code of Civil Procedure, 1908 but is guided by the principle of natural justice and has the powers to regulate its own proceedings.
Answer 2(b)(i)
DVP - Delivery Versus Payment. Answer 2(b)(ii) EDIFAR - Electronic Data Information Filing and Retrieval. Answer 2(b)(iii) OMO - Open Market Operations. EP–SLC – December 2009 46 Answer 2(c) Real Estate Mutual Fund Scheme (REMFS) means a mutual fund scheme that invests directly or indirectly in the real estate assets or other permissible assets in accordance with SEBI (Mutual Fund) Regulations, 1996. Some of the salient features of REMFS are follows : (i) Existing Mutual Funds are eligible to launch real estate mutual funds if they have adequate number of experienced key personnel/directors. (ii) Sponsors seeking to set up new Mutual Funds, for launching only real estate mutual fund schemes, shall be carrying on business in real estate for a period not less than five years. (iii) Every real estate mutual fund scheme shall be close-ended and its units shall be listed on a recognized stock exchange. (iv) Net asset value (NAV) of the scheme shall be declared daily. (v) Each asset shall be valued by two valuers, who are accredited by a credit rating agency, every 90 days from the date of purchase. ‘Lower of the two values shall be taken for the computation of NAV. (vi) Caps will be imposed on investments in a single city, single project, securities issued by sponsor/associate companies etc. (vii) A real estate mutual fund scheme shall not undertake lending or housing finance activities. (viii) There are specific accountings and valuation norms, pertaining to Real Estate Mutual Fund scheme. Question 3 (a) Explain any two of the following terms in relation to securities reforms and developments in our country : (i) Corporate governance (ii) Financial disclosures (iii) Rolling settlement. (3 marks each) (b) Write a note on 'treasury bills'. (5 marks) (c) Explain briefly the following : (i) BOLT (ii) NEAT. (2 marks each) Answer 3(a)(i) Corporate Governance Corporate Governance is the application of best management practices, compliance of law in true letter and spirit and adherence to ethical standards for effective management 47 EP–SLC – December 2009 and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders. Good Governance in capital market has always been high on the agenda of SEBI. Corporate governance is looked upon as a distinctive brand and benchmark in the profile of Corporate Excellence. This is evident from the continuous updation of guidelines, rules and regulations by SEBI for ensuring transparency and accountability. Answer 3(a)(ii) Financial Disclosure One of the major responsibilities of the board of directors is to ensure that shareholders and other stakeholders are provided with high-quality disclosures on the financial and operating results of the entity. Almost all corporate governance require the board of directors to provide shareholders and other stakeholders with information on the financial and operating results of a company to enable them to properly understand the nature of its business, its current state of affairs and how it is being developed for the future. The quality of financial disclosure depends significantly on the robustness of the financial reporting standards on the basis of which the financial information is prepared and reported. Answer 3(a)(iii) Rolling Settlement Under rolling settlements, unlike the “account period settlements”, the trades done on a particular day are settled after a given number of business days instead of settling all trades done during an ‘account period’ of a week or fortnight. In case of Rolling Settlements, pay-in and pay-out of both funds and securities is completed on the same day. Each trading day is considered as a trading period and trades executed during the day are settled to obtain the net obligations for the day in a rolling settlement. Answer 3(b) Treasury Bills Treasury Bills are money market instruments to finance the short term requirements of the Government of India. These are discounted securities and thus are issued at a discount to face value. The return to the investor is the difference between the maturity value and issue price. In the short term, the lowest risk category instruments are the treasury bills. Features of Treasury Bills (a) The treasury bills are issued in the form of promissory note in physical form or by credit to Subsidiary General Ledger (SGL) account or Gilt account in dematerialized form. (b) Bids for Treasury bill are to be made for a minimum amount of Rs.25000/- only and in multiples thereof. (c) All entities registered in India like Banks, Financial Institutions, Primary Dealers, Firms, Companies, Corporate Bodies, Partnership Firms, Institutions, Mutual EP–SLC – December 2009 48 Funds, Foreign Institutional Investors, State Governments, Provident Funds, Trusts, Research Organizations, Nepal Rashtra bank and even individuals are eligible to bid and purchase Treasury bills. (d) The treasury bills are repaid at par on the expiry of their tenor at the office of the Reserve Bank of India. (e) All the treasury Bills are highly liquid instruments available both in the primary and secondary market. (f) For treasury bills the day count is taken as 365 days for a year. (g) The yield of a Treasury bill is calculated as per the following formula: (100 - P) x 365 x 100 Y = P x D
Answer 3(c)(i) BOLT BSE on-line-Trading (BOLT) is the modern trading practice introduced by the Bombay Stock Exchange. Under this arrangement, trading can be carried out by member-brokers and their authorized assistants from their workstations. It provides for a search based trading mechanism whereby two-way quotes are accepted from jobbers and Market Makers and from brokers on the basis of orders received from investors. The system matches them according to the logic specified in BOLT. Answer 3(c)(ii) NEAT 'National Exchange for Automated Trading (NEAT) which is the sophisticated fully automated screen based trading system operated by NSE, which is order driven without trading intermediaries to quote buy or sell prices of stock as an inducement. The systems matches the orders received and executed on a price time priority basis systematically. The orders are entered combining time, price and quantity conditions. Question 4 (a) Distinguish between any two of the following : (i) 'Naked debentures' and 'secured debentures', (ii) 'Industrial revenue bonds' and 'commodity bonds', (iii) 'Indexed rate notes' and 'extendable notes'. (3 marks each) (b) Describe briefly the risks involved in mutual funds. (4 marks) (c) What do you mean by 'dematerialisation of securities' ? State its benefits. (5 marks) Answer 4(a)(i) Naked debentures Debentures of this kind do not carry any charge on the assets of the company. The holders of such debentures do not therefore have the right to attach particular property by way of security as to repayment of principal or interest. 49 EP–SLC – December 2009 Secured debentures Debentures that are secured by a mortgage of the whole or part of the assets of the company are called mortgage debentures or secured debentures. The mortgage may be one duly registered in the formal way or one which is secured by the deposit of title deeds in case of urgency. Answer 4(a)(ii) Industrial Revenue Bonds Industrial revenue bonds are issued by financial institutions in connection with the development or purchase of industrial facilities. The bond proceeds could be used to purchase or a construct facilities which are subsequently leased or sold to the company. Commodity Bonds Commodity bonds are bonds issued to share the risk and profitability of future commodity prices with the investor. For example, petro bonds, silver bonds, gold bonds and coal bonds. Answer 4(a)(iii) Indexed Rate Notes In Indexed rate notes, the interest rate fixation is postponed till the actual date of placement, rather than fixing it on the date of the commitment. The interest rate is computed on the date of take down at the then prevailing private placement rates, using a formula based on the index such as the 182 days treasury bill yield rates. Extendable Notes Extendable notes are issued for 10 years with flexibility to the issuer to review the interest rate every two years. The interest rate is adjusted every two years to reflect the then prevailing market conditions by trying the interest rate to a spread over a bond index such as two years treasury notes. However, investors have a put option at par value every two years i.e. they have the right to sell the bond to the issuer at a fixed rate on the expiry of every two years. Answer 4(b) Risks involved in Mutual Funds (i) Excessive diversification of portfolio, losing focus on the securities of the key segments. (ii) Too much concentration on blue-chip securities which are high priced and which do not offer more than average return. (iii) Necessity to effect high turnover through liquidation of portfolio resulting in large payments of brokerage and commission. (iv) Poor planning of investment with minimum returns. (v) Unresearched forecast on income, profits and government policies. EP–SLC – December 2009 50 (vi) Fund managers being unaccountable for poor results. (vii) Failure to identify clearly the risk of the scheme as distinct from risk of the market. Answer 4(c) Dematerialisation Dematerialisation is a process by which the physical share certificates of an investor are taken back by the Company and an equivalent number of securities are credited in the account in electronic form at the request of the investor. An investor will have to first open an account with a Depository Participant and then request for the dematerialization of his share certificates through the Depository Participant so that the dematerialized holdings can be credited into account. Benefits of Dematerialisation — Elimination of bad deliveries — Elimination of all risks associated with physical certificates — Immediate transfer and registration of securities — Faster disbursement of non-cash corporate benefits like rights, bonus etc. — Reduction in handling of huge volumes of paper and periodic status reports. Question 5 (a) Discuss the various functions of 'price monitoring'. (5 marks) (b) State the procedure for buy-back of securities through stock exchange. (5 marks) (c) Discuss the norms for registration of portfolio managers with the Securities and Exchange Board of India (SEBI). (5 marks) Answer 5(a) Functions of Price Monitoring The functioning of the Price Monitoring is broadly divided into following activities: (i) On-line Surveillance System generates the alerts on-line, in real time, based on certain present parameters like price and volume variations in scrips etc. (ii) Off-line Surveillance System comprises of the various reports based on different parameters and scrutiny thereof. (iii) Derivative Market Surveillance focus on abnormal fluctuation, Market Movement, Member Concentration and Closing Price Manipulation. (iv) Investigations conduct in-depth investigations based on preliminary enquiries/ analysis made into trading of the scrips. (v) Surveillance Actions includes Special Margins, Reduction of Circuit Filters and 51 EP–SLC – December 2009 Circuit Breakers, Trade to trade, Suspension of a scrip, Warning to members, Imposition of penalty/ Suspension/ Deactivation of terminals. (vi) Rumor verification and proactive measures. Answer 5(b) The Procedure for buy back through purchase in open market at stock exchange is as follows: (i) In the special resolution or Board resolution passed for buy-back through stock exchange, the maximum price at which the buy-back shall be made should be specified. (ii) Promoters or persons in control are not permitted to offer their securities. (iii) The company should appoint a merchant banker and make a public announcement containing necessary disclosures, at least 7 days prior to the commencement of buy-back. A copy of the same should be filed with SEBI within 2 days of such announcement along with the required fees. (iv) The buy-back shall be made only on stock exchanges having nationwide trading terminals and electronic trading facility. (v) The buyback of shares shall be made only through order matching mechanism except 'all or none' order matching system. (vi) The company and the merchant banker is required to submit the information regarding buy back to the stock exchange on a daily basis and publish the said information in a national daily on a fortnightly basis and every time when an additional five per cent of the buy back has been completed. (vii) The identity of the Company as a purchaser shall appear on the electronic screen when the order is placed. Answer 5(c) Norms for registration as Portfolio Managers The requirements to be satisfied by the applicant for getting the certificate of registration as mentioned in Regulation 6 of SEBI (Portfolio Managers) Regulations, 1993 are as follows: (a) the applicant is a body corporate; (b) the applicant has the necessary infrastructure and fulfills the capital adequacy requirement; (c) the principal officer of the applicant has the professional qualifications in finance, law, accountancy or business management from an institution recognized by the Government; (d) the applicant has in its employment minimum of two persons who, between them, have at least five years experience as portfolio manager or stock broker or investment manager or in the areas related to fund management; EP–SLC – December 2009 52 (e) The applicant, director and its principal officer or the employees state above is not involved in any litigation connected with the securities market which has an adverse bearing on the business of the applicant and has not at any time been convicted for any offence involving moral turpitude or has been found guilty of any economic offence; (f) No previous application for grant of certificate made by any person directly or indirectly connected with the applicant has been rejected by the Board; (g) No disciplinary action has been taken by the Board against a person directly or indirectly connected with the applicant under the Act or the Rules or the Regulations made there under; (h) The applicant is a fit and proper person; (i) Grant of certificate to the applicant is in the interests of investors. PART B (Answer ANY TWO questions from this part) Question 6 (a) Explain the meaning of any two of the following in the context of international capital market : (i) Domestic custodian bank (ii) Global depository receipts. (iii) Overseas depository bank. (3 marks each) (b) What are the conditions for 'voluntary delisting of securities' ? (4 marks) (c) "In issuance of GDRs/FCCBs, pre-marketing exercise is a tool through which the syndicate members evaluate the prospects of the issue." Comment. (5 marks) (d) Who can access 'external commercial borrowings' (ECBs) under automatic route as per Reserve Bank of India ? (5 marks) Answer 6(a)(i) Domestic Custodian Bank This is a banking company which acts as custodian for the ordinary shares or Foreign Currency Convertible Bonds of an Indian Company, which are issued by it. The domestic custodian bank functions in co-ordination with the depository bank. When the shares are issued by a company the same are registered in the name of depository and physical possession is handed over to the custodian. The beneficial interest in respect of such shares, however, rests with the investors. Answer 6(a)(ii) Global Depository Receipts It is a form of depository receipt of certificate created by the Overseas Depository Bank outside India denominated in dollar and issued to non-resident investors against 53 EP–SLC – December 2009 the issue of ordinary shares or foreign currency convertible bonds of issuing company. In simple words, it is basically a negotiable instrument denominated in US dollars. It is traded in Europe or the US or both. GDR is traded like any other dollar denominated security in the foreign markets. Answer 6(a)(iii) Overseas Depository Bank It means a bank authorized by the issuing company to issue Global Depository Receipts against issue of Foreign Currency Convertible Bonds or ordinary shares of the issuing company. In case of redemption of Global Depository Receipts, Overseas Depository Bank shall request the Domestic Custodian Bank to get the corresponding underlying shares released in favour of the non-resident investor, for being sold directly on behalf of the non-resident, or being transferred in the books of account of the issuing company in the name of the non-resident. Answer 6(b) Conditions for Voluntary Delisting of Securities (i) Company shall not use the buy-back method to delist its securities. (ii) The amount of consideration shall be settled in cash. The payment of consideration for delisting of securities shall be paid in cash by the promoter or acquirer. (iii) In case of partly paid-up securities, the price determined by the book building process shall be applicable to the extent the call has been made and paid. (iv) In the case of infrequently traded securities, the offer price and infrequently traded shares shall be determined in the manner explained under SEBI Takeover Regulations. (v) The promoter may not accept the securities at the offer price determined by the book building process. (vi) When a company, which is listed on any stock exchange or stock exchanges other than BSE or NSE (i.e., the stock exchanges having nationwide trading terminals), seeks delisting, an exit offer shall be made to the shareholders. (vii) Before making application for delisting, the promoters or the acquirers of the company shall make a public announcement. Answer 6(c) Pre-marketing exercise is a tool through which the syndicate members evaluate the prospects of the issue. This is normally done closer to the issue. The research analysts along with the sales force of the syndicate members meet the prospective investors during pre-marketing road shows. This enables the syndicate members to understand the market and the probable response from the prospective investors. The pre-marketing exercise helps in assessing the depth of investors’ interest in the proposed issue, their view about the valuation of the share and the geographical locations of the investors who are interested in the issue. The response received during pre-marketing provides EP–SLC – December 2009 54 vital information for taking important decisions relating to timing, pricing and size of the issue. This would also help the syndicate members in evolving strategies for marketing the issue. Answer 6(d) Access to External Commercial Borrowings (ECB) under Automatic Route 1. Corporates (registered under the Companies Act except financial intermediaries (such as banks, financial institutions (FIs), housing finance companies and NBFCs) are eligible to raise ECB. Individuals, trusts and non-profit organizations are not eligible to raise ECB. 2. Non-Government Organizations (NGOs) engaged in micro finance activities are eligible to avail ECB. Such NGO should have a satisfactory borrowing relationship for at least 3 years with a scheduled commercial bank authorized to deal in foreign exchange and require a certificate of due diligence on ‘fit and proper’ status of the board/committee of management of the borrowing entity from the designated Authorized Dealer (AD) bank. 3. Units in Special Economic Zones (SEZ) are allowed to raise ECB for their own requirement. However, they cannot transfer or on-lend ECB funds to sister concerns or any unit in the Domestic Tariff Area. Question 7 (a) Discuss briefly the provisions of the SEBI (Prohibition of Fraudulent and Unfair Practices Relating to Securities Market) Regulations, 2003 related to — (i) Misleading statements; (ii) Market manipulations; (iii) Dealings in securities; and (iv) Prohibition on certain dealings in securities. (10 marks) (b) What are the common grievances of investors in India ? State the authorities which can be approached by an investor for redressal of these grievances. (10 marks) Answer 7(a) Provisions of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 2003 Regulation 3 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 2003 prohibits certain dealings in securities and provides that no person shall directly or indirectly: (i) Buy, sell, or otherwise deal in securities in a fraudulent manner; (ii) Use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the Rules or the Regulations made there under; 55 EP–SLC – December 2009 (iii) Employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized Stock Exchange; (iv) Engage in any act, practice and course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the Rules and the Regulations made there under. Regulation 4 of the Regulations provides that: (i) Without prejudice to the provisions of Regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securities. (ii) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud. Answer 7(b) Various common grievances of investors in India are as follows: (i) In case of any public issue, Interest on delayed refund, Allotment advice, Share certificates and revalidations in case shares are held in physical mode. (ii) Regarding listed debentures, non-receipt of Interest due, redemption proceeds, Interest on delayed payment. (iii) Grievance relating to shares or debentures in unlisted companies. (iv) Grievance relating to Deposits in collective investment schemes like plantations etc. and Units of Mutual Funds; Fixed Deposits in Banks and Finance Companies and Manufacturing companies. In respect of the grievances of investor, complaints can be lodged with the Registrar of Companies, Ministry of Company Affairs, Stock Exchange or SEBI as the case may be and in certain cases, they can be pursued with the Company Law Board also to obtain remedies and relief. Investor Grievance Centres have been set-up in every recognized stock exchange which takes up all complaints regarding the trades effected in the exchange and the relevant member of the exchange. Moreover, two other avenues are always available to the investors to seek redressal of their companies i.e., companies with Consumers Disputes Redressal Forum and Suits in the Court of Law. Question 8 Attempt any four of the following : (i) "PAN has to be the sole identifier number for all transactions in the securities market." Comment. (5 marks) (ii) State the activities stipulated under the Investor Education and Protection Fund (Awareness and Protection of Investors) Rules, 2001. (5 marks) (iii) Explain the regulatory framework of debt market in India. (5 marks) (iv) What is the lock-in-period requirement for promoters' contribution ? (5 marks) EP–SLC – December 2009 56 (v) What are the rights of securities-holders in case of compulsory delisting of securities ? (5 marks) Answer 8(i) Permanent Account Number (PAN) PAN is the sole identification number for all participants in the securities market with an alpha-numeric prefix or suffix to distinguish a particular kind of account. In order to strengthen the Know Your Client (KYC) norms and identify every participant in the securities market with their respective PAN thereby ensuring sound audit trail of all the transactions. PAN has been made the sole identification number for all participants transacting in the securities market, irrespective of the amount of transaction. It is mandatory for the transferee(s) to furnish copy of PAN card to the Company/ RTAs for registration of transfer of shares in physical form for securities market transactions and off-market/private transactions involving transfer of shares in physical form of listed companies. Answer 8(ii) Investor Education and Protection Fund (IEPF) Investor Education and Protection Fund (Awareness and Protection of Investors) Rules, 2001 (IEPF Rules) stipulate the activities related to investors’ education, awareness and protection for which the financial sanction can be provided under IEPF. Activities undertaken by IEPF include : educating and creating awareness among investors through Voluntary associations or organizations registered under IEPF; Educating investors through Media, conducted panel discussions on DD (Delhi, Mumbai, Kolkata, Chennai and Ahmedabad), Telecast of TV Video spots on DD & private channels, print advertisement in national as well as regional newspapers. All these programmes have been undertaken in Hindi, English and Regional languages; Organizing seminars and workshops through associations, registered under IEPF; Financing research projects pertaining to Investor education, awareness and coordinating with institutions engaged in investor education, awareness. Answer 8(iii) Regulatory Framework of Debt Market in India Issue and listing of non-convertible debt securities, whether issued to the public or privately placed, are required to be made in accordance with the provisions of the SEBI (Issue and Listing of Debt Securities) Regulations, 2008. Issue of debt securities that are convertible, either partially or fully or optionally into listed or unlisted equity shall be guided by the disclosure norms applicable to equity or other instruments offered on conversion in terms of SEBI (DIP) Guidelines, 2000 (Now ICDR Regulations). SEBI (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008 deals with public offers of securitised debt instruments or to listing of securitized debt instruments issued to public or any person(s), on a recognized stock exchange. 57 EP–SLC – December 2009 Continuing with rationalization of disclosure norms for listing of debt issuances, SEBI has issued Listing Agreement for debt securities. Answer 8(iv) Lock-in-period requirement for promoters’ contribution Any contribution made by promoters over and above the minimum contribution shall be subject to a lock-in-period of one year in case of all the companies. In case of the existing listed companies, additional contribution is subject to lock-in-period of one year as per guidelines for Preferential Issue of Capital. Promoters’ contribution for meeting shortfall in the firm allotment category shall also be locked-in for a period of one year. In case of issue of securities by a company listed on a stock exchange for at least three years and having a track record of dividend payment for at least three immediately preceding years promoter’s contribution shall not be subject to lock-in-period. Answer 8(v) Rights of Securities Holders in case of Compulsory Delisting of Securities Where the securities of the company are delisted by an exchange, the promoter of the company shall be liable to compensate the security-holders of the company by paying them the fair value of the securities held by security-holders and acquiring their securities. However, security holders shall be given an option to remain security-holders with the company. The person appointed by the Stock Exchange out of a panel of experts, which shall also be selected by the Stock Exchange shall determine fair value, having regard to the factors mentioned in the Takeover Regulations.