1 EP–GCL–December 2008

EXECUTIVE PROGRAMME EXAMINATION

DECEMBER 2008

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) “Article 14 of the Constitution of India forbids class legislation, but does not
forbid classification.” Explain the rules with respect to permissible classification
as evolved by the Supreme Court of India. (8 marks)
(b) What is writ of habeas corpus ? When can it be issued ? (4 marks)
(c) Re-write the following sentences after filling-up the blank spaces with appropriate
word(s)/figure(s) :
(i) An instrument chargeable with duty executed out of India may be stamped
within ______________ month(s) after it has been first received in India.
(ii) Alam owes Balu Rs. 1,000. Alam sells a property to Balu, the consideration
being Rs.500 and the release of the previous debt of Rs.1,000. Stamp duty
would be payable on Rs. _______________.
(iii) Attestation is valid and complete when _______________ witnesses sign
the instrument.
(iv) No sentence of imprisonment for a term exceeding ____________shall be
passed in any case or instance in a summary trial.
(v) Interpretation of a statute should not be given a meaning which would make
other provisions _____________.
(vi) A person who refuses to receive a registered letter is deemed to have _______
notice of its contents.
(vii) Doctrine which underlines the general principle that no one shall be vexed
twice for the same cause in civil cases is called _____________.
(viii) High Court issued an order to the holder of office to show to the court under
what authority he holds the office. This writ is called ________________.
(1 mark each)
Answer 1(i)
Article 14 of the Constitution says that “the State shall not deny to any person
equality before the law or the equal protection of the laws within the territory of India”.
As is evident, Article 14 guarantees to every person the right to equality before the
law or the equal protection of the laws within the territory of India. Article 14 applies to all
persons and is not limited to citizens.
A right conferred on persons that they shall not be denied equal protection of the
laws does not mean the protection of the same laws for all. It is here that the doctrine of
classification steps in and gives content and significance to the guarantee of the equal

1
EP–GCL–December 2008 2
protection of the laws. To separate persons similarly situated from those who are not,
legislative classification or distinction is made carefully between the persons who are
and who are not similarly situated.
Test of valid classification
Since a distinction is to be made for the purpose of enacting a legislation, it must
pass the classical test enunciated by the Supreme Court in State of West Bengal v.
Anwar Ali Sarkar, AIR 1952 SC 75. Permissible classification must satisfy two conditions,
namely; (i) it must be founded on an intelligible differentia which distinguishes persons
or things that are grouped together from others left out of the group; and (ii) the differentia
must have a rational nexus with the object sought to be achieved by the statute in
question.
The classification may be founded on different basis, such as, geographical, or
according to objects or occupation or the like. What is necessary is that there must be
a nexus between the basis of classification and the object of the Act under consideration.
The rules with respect to permissible classification as evolved in the various decisions
have been summarised by the Supreme Court in Ram Kishan Dalmiya v. Justice
Tendulkar, AIR 1958 SC 538, as follows:
(i) Article 14 forbids class legislation, but does not forbid classification.
(ii) Permissible classification must satisfy two conditions, namely, (a) it must be
founded on an intelligible differentia which distinguishes persons or things that
are grouped together from others left out of the group, and (b) the differentia
must have a relation to the object sought to be achieved by the statute in
question.
(iii) The classification may be founded on different basis, namely geographical, or
according to objects or occupations or the like.
(iv) In permissible classification, mathematical nicety and perfect equality are not
required. Similarly, non identity of treatment is enough.
(v) Even a single individual may be treated a class by himself on account of some
special circumstances or reasons applicable to him and not applicable to others;
a law may be constitutional even though it relates to a single individual who is in
a class by himself.
(vi) Article 14 condemns discrimination not only by substantive law but also by a
law of procedure.
(vii) There is always a presumption in favour of the constitutionality of an enactment
and the burden is upon him who attacks it to show that there has been a clear
transgression of the constitutional principles.
A remarkable example of the application of the principle of equality under the
Constitution is the decision of the Supreme Court in R.K. Garg v. Union of India, AIR
1981 SC 2138. It should be mentioned that Article 14 invalidates discrimination not
only in substantive law but also in procedure. Further, it applies to executive acts
also.
 3 EP–GCL–December 2008
In the recent past, Article 14 has acquired new dimensions. The Supreme Court has
held that Article 14 strikes at arbitrariness in State action and ensures a fairness and
equality of treatment. The principle of reasonableness, which logically as well as
philosophically, is an essential element of equality or non-arbitrariness pervades Article
14 like a brooding omnipresence (See Maneka Gandhi v. Union of India, AIR 1978 SC
597; Ramana Dayaram Shetty v. International Airport Authority, AIR 1979 SC 1628;
Kasturi Lal v. State of J&K, AIR 1980 SC 1992) . In Ajay Hasia v. Khalid Mujib, AIR
1981SC 487, the Supreme Court held “ …. what Article 14 strikes at is arbitrariness
because an action that is arbitrary must necessarily involve negation of equality…..
In Secy., State of Karnataka v. Umadevi, (2006) 4 SCC 1, the Supreme Court has
held that adherence to the rule of equality in public employment is a basic feature of our
Constitution and since the rule of law is the core of our Constitution, a court would
certainly be disabled from passing an order upholding the violation of Article 14.
Answer 1(ii)
The writ of Habeas corpus
The writ of habeas corpus is a remedy available to a person who is confined without
legal justification. The words “habeas corpus” literally mean “to have a body”. Habeas
corpus may be defined as a judicial order issued by the Supreme Court or a High Court
by which a person who is confined by any public or private agency, may secure his
release. The writ is in the form of an order calls upon the person in whose confinement
the person is to let the court know the legal justification for the detention, and in the
absence of such justification to release the person from his confinement. The great
value of this writ is that it enables an immediate determination of a persons’ right to
freedom.
Under Article 32 of the Constitution, the Supreme Court can issue writ of habeas
corpus against a person/authority who has detained a person without legal justification.
Likewise the High Court under Article 226 of the Constitution can issue writ of habeas
corpus in similar circumstances provided that the person or authority against whom the
writ is sought is within the territorial jurisdiction of that High Court on the date of filing the
writ petition.
Writ of habeas corpus can be filed by any person on behalf of the detained or by the
detained person himself. However, every petition must be supported by an affidavit
stating the facts and circumstances of detention and, where relevant, the reasons as to
why the prisoner is unable to make application
Answer 1(c)
(i) 3 Months
(ii) Rs. 1500/-
(iii) 2 witnesses
(iv) 3 months
(v) Redundant
(vi) Constrictive
EP–GCL–December 2008 4
(vii) Res -judicata
(viii) Quo-warranto
Question 2
Attempt any four of the following :
(i) State the conditions to recover the possession of dispossessed immovable
property based merely on possession.
(ii) Mention persons against whom specific performance cannot be enforced.
(iii) What are the essentials of an arbitral award ?
(iv) What is the principle of estoppel under the Indian Evidence Act, 1872 ?
(v) Describe the offence of ‘hacking’ with computer system as provided under the
Information Technology Act, 2000. (4 marks each)
Answer 2(i)
Sections 5 and 6 of the Specific Relief Act, 1963 provide for the remedy for recovering
possession of property i.e. immovable property. Section 5 dealing with recovery on the
strength of title lays down that a ‘person entitled to the possession of specific immovable
property may recover it in the manner provided by the Code of Civil Procedure 1908. It
means a suit for ejectment on the basis of title could be brought.
Section 6 of the specific Relief Act, 1963 deals with the recovery of immovable
property on the strength of possession. Section 6(1) deals with situations where a person
has been dispossessed from immovable property without his consent and due course of
law and provides that in case any person is dispossessed without his consent of immovable
property otherwise than in due course of law, he or any person claiming through him may by
suit recover possession thereof notwithstanding any title that may be set-up in such suit.
Sub-section (2) further provides that, no suit shall be brought:
(a) after the expiry of six months from the date of dispossession;
(b) against the Government;
(c) no appeal shall lie from any orders or decree passed in any suit instituted under
this Section.
Therefore, to attract Section 6, following conditions must exist;
(a) Plaintiff has been dispossessed.
(b) Plaintiff has been dispossessed without his consent and without due process of
law.
(c) Plaintiff has been dispossessed during last six months from the date of institution
of suit.
If the above conditions are fulfilled then no quesiton of title of the plaintiff or of the
defendant can be raised or gone into. Plaintiff’s previous possession is sufficient to
give relief under this Section. The Plaintiff must be in legal possession of the property
under some right. In M/s Chandra & Co. v. State of Rajasthan (AIR 1976 SC 1628) the
Apex Court held that State Government cannot forcibly evict a person who was in peaceful
 5 EP–GCL–December 2008
possession and the High Court upon a petition under Article 226 may provide appropriate
relief to the aggrieved.
Answer 2(ii)
As per Section 16 of the Specific Relief Act, 1963 specific performance of a contract
cannot be enforced in favour of a person—
(a) who would not be entitled to recover compensation for its breach; or
(b) who (i) has become incapable of performing, or (ii) violates any essential term
of, the contract that on his part remains to be performed, or (iii) acts in fraud of
the contract, or (iv) wilfully acts at variance with, or in subversion of, the relation
intended to be established by the contract; or
(c) who fails to aver and prove that he has performed or has always been ready and
willing to perform the essential terms of the contract which are to be performed
by him, other than terms the performance of which has been prevented or waived
by the defendant.
The Explanation appended to the Section provides that where a contract involves
the payment of money, it is not essential for the plaintiff to actually tender to the defendant
or to deposit in court any money except when so directed by the court; further, the
plaintiff must aver performance of, or readiness and willingness to perform, the contract
according to its true construction.
Answer 2(iii)
Award means the decision of the arbitrator to whom the dispute is referred. The
definition of arbitral award under Section 2(1)( c) of the Arbitration and Conciliation Act,1996
does not give much details of an arbitral award. It says “arbitral award” includes an
interim award.
In fact, an award is a document incorporating the adjudication or determination of a
matter in dispute by the person competent to adjudicate and determine the dispute. An
arbitral award is such adjudication by the arbitral Tribunal to whom dispute is referred.
Essential Ingredients : As per Section 31 of the Arbitration and Conciliation Act,
1996 an arbitral award shall be made in writing and shall be signed by the members of
the arbitral Tribunal. If the arbitral Tribunal consists of more than one arbitrator, it will be
sufficient if the majority of the members of the Tribunal sign it provided reasons are
given for the omitted signatures.
An arbitral Tribunal must state reasons for its award except when the parties
have agreed that no reasons be given, or when the award is on agreed terms under
Section 30.
The arbitral award shall state its date and the place of arbitration determined according
to Section 20.
After the award is made, a signed copy shall be given to each party.
The arbitral Tribunal may grant interest if the arbitral award is for the payment of
money for the period between the date on which the cause of action arose and the date
EP–GCL–December 2008 6
on which the award is made. This is subject to the agreement of the parties to the
contrary. The Tribunal may grant interest at such rate as it deems reasonable, on the
whole or part of the money found due, for the whole or any part of the period.
Award may include directions of the arbitral Tribunal regarding costs of the arbitration.
Answer 2(iv)
The general rule of estoppel is when one person has by his declaration, act or
omission, intentionally caused or permitted another person to believe a thing to be true
and to act upon such belief, neither he nor his representative shall be allowed, in any
suit or proceeding between himself and such person or his representative to deny the
truth of that thing (Section 115). However, there is no estoppel against the Statute.
Where the Statute pescribes a particular way of doing something, it has to be done in
that manner only.
Estoppel is based on the maxim ‘allegans contratia non est audiendus’ i.e. a person
alleging contrary facts should not be heard. The principles of estoppel covers one kind
of facts. It says that man cannot approbate and reprobate, or that a man cannot blow hot
and cold, or that a man shall not say one thing at one time and later on say a different
thing.
The doctrine of estoppel is based on the principle that it would be most inequitable
and unjust that if one person, by a representation made, or by conduct amounting to a
representation, has induced another to act as he would not otherwise have done, the
person who made the representation should not be allowed to deny or repudiate the
effect of his former statement to the loss and injury of the person who acted on it (Sorat
Chunder v. Gopal Chunder).
Estoppel is a rule of evidence and does not give rise to a cause of action. There are
different kinds of estoppel by conduct or estoppel in pais. They are: (a) estoppel by
attestation (b) estoppel by contract (c) constructive estoppel (d) estoppel by election (e)
equitable estoppel (f) estoppel by negligence, and (g) estoppel by silence.
Answer 2(v)
Section 66 of the information Technology Act, 2000 deals with “hacking” with computer
system. The term “hacking” with respect of computer terminology denotes the act of
obtaining unauthorized access to a computer system. Section 66 of the Information
Technology Act, 2000, provides that:
(1) Whoever with intent to cause, or knowing that he is likely to cause, wrongful
loss or damage to the public or any person, destroys or deletes or alters any
information residing in a computer resource or diminishes its value or utility or
affects it injuriously by any means, commits hacking.
(2) Whoever commits hacking, shall be punished with imprisonment up to three
years or with fine which may extent upto two lakh rupees or with both.
The Section imputes intention as per knowledge to the hacker. Modification of the
contents of a computer will also be an offence. Modification includes addition, alteration
and erasure. As is evident, the maximum punishment prescribed for hacking with computer
system under Section 66(2) is imprisonment upto three years or with fine upto two lakh
rupees or both.
 7 EP–GCL–December 2008
Question 3
Explain any four of the following :
(i) Mischief rule.
(ii) Doctrine of part-performance.
(iii) Doctrine of election.
(iv) Domain name and passing-off.
(v) Digital signature. (4 marks each)
Answer 3(i)
Mischief rule
The mischief rule of interpretation originated in Heydon’s case, 76 ER 637 in 1584.
In this case, the Barons of the Exchequer resolved that for the sure and true interpretation
of all statutes in general, (be they penal or beneficial, restrictive or enlarging of the
Common Law) four things are to be discerned and considered:
(1) What was the Common Law before the making of the Act;
(2) What was the mischief and defect for which the Common Law did not provide;
(3) What remedy the Parliament had resolved and appointed to cure the disease of
the Commonwealth; and
(4) The true reason of the remedy.

When the material words are capable of bearing two or more constructions, the most
firmly established rule for construction of such words is the rule laid down in Heydon’s
case which has “now attained the status of a classic”. The rule directs that the Courts
must adopt that construction which “shall suppress the mischief and advance the remedy”.
But this does not mean that a construction should be adopted which ignores the plain
natural meaning of the words or disregard the context and the collection in which they
occur. (See Umed Singh v. Raj Singh, AIR. 1975 SC 43) The Supreme Court has applied
this rule in many of its decisions.

Answer 3(ii)

Doctrine of part-performance

The doctrine of part-performance operates as an exception to the principal that

equity will only enforce specific performance of a contract that is valid at law and provable
in courts of law. The doctrine has been statutorily recognized under Section 53A of the
Transfer of Property Act; Specific Relief Act (Section 27A) and Indian Registration Act
(Section 49).

Followings are the essential conditions for the operation of the doctrine of part-
performance according to Section 53A.
1. There must be a contract to transfer immoveable property.
2. It must be for consideration.
EP–GCL–December 2008 8
3. The contract should be in writing and signed by the transferor himself or on his
behalf.
4. The terms necessary to constitute the transfer must be ascertainable with
reasonable certainty from the contract itself.
5. The transferee should have taken the possession of the property in part
performance of the contract. In case he is already in possession, he must have
continued in possession in part performance of the contract and must have
done something in furtherance of the contract.
6. The transferee must have fulfilled or ready to fulfill his part of the obligation
under the contract.
If all the abovementioned conditions are satisfied, then, the transferor and the persons
claiming under him are debarred form 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. It should be noted that Section 53A
does not confer 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 3(iii)

Doctrine of Election

Section 35 of the Transfer of Property Act deals with what is called doctrine of
election. Suppose, a property is given to you and in the same deed of gift you are asked
to transfer something belonging to you to another person. If you want to take the property
you should transfer your property to someone else, otherwise you cannot take the property
which is transferred to you by some one. Election may be defined as “the choosing
between two rights where there is a clear intention that both were not intended to be
enjoyed”.

The foundation of doctrine of election is that a person taking the benefit of an

instrument must also bear the burden, and he must not take under and against the same
instrument. It is, therefore, a branch of a general rule that no one may approbate and
reprobate [Copper v. Copper (1874) H.L. 53].

Answer 3(iv)

Domain Name and Passing-off

It is vital, that prior to entering into any type of business activity, a company must
be traceable relatively easily, on the Internet, i.e. it must have an address in cyber-
space. This may be linked to a company having its Registered Office to which all
communications are usually directed. This explains the utility of registration under a
particular domain name and website. This has been made possible with the emergence
of the Domain Name System (“DNS”). Such registration would enable the company to
conduct on-line transactions, as well as make it easily traceable by customers, suppliers,
etc.
 9 EP–GCL–December 2008
Passing off : The Information Technology Act does not contain a specific provision,
declaring illegal any fraudulent use, by one person, of other person’s domain
name.However, even in the absence of specific legislation on the subject, such conduct
can become actionable under the law of torts. In fact, judicial decisions, both in India
and elsewhere, amply demonstrate the potency of the law of torts in this context. The
tort of “passing off” is wide enough to afford legal redress (in damages) to a person who
is the holder of a particular domain name and who suffers harm as a result of the
fraudulent use of his domain name by another person. Such conduct has been regarded
as falling under the tort of “passing off”.
Answer 3(v)
Digital Signature
“Digital Signature” under Section 2(p) of the Information Technology Act, 2000 means
authentication of any electronic record by a subscriber by means of an electronic method
or procedure in accordance with the provisions of Section 3.
Section 3 deals with authentication of electronic records. This section provides the
conditions subject to which an electronic record may be authenticated by means of
affixing digital signature. The digital signature is treated in two distinct steps. First the
electronic record is converted into a message digest by using a mathematical function
known as “hash function” which digitally freezes the electronic record thus ensuring the
integrity of the content of the intended communication contained in the electronic record.
Any tempering with the contents of the electronic record will immediately invalidate the
digital signature. Secondly, the identity of the person affixing the digital signature is
authenticated through the use of private key which is attached to the message digest
and which can be verified by any person who has the public key corresponding to such
private key. This will enable any person to verify whether the electronic record is retained
intact or has been tampered with. It will also enable a person who has a public key to
identify the originator of the electronic message.
Question 4
Distinguish between any four of the following :
(i) 'Judgment’, ‘decree’ and ‘order’.
(ii) ‘Set-off, ‘counter-claim’ and ‘equitable set-off.
(iii) ‘Appeal’, ‘revision’ and ‘review’.
(iv) 'Cognizable offence’ and ‘non-cognizable offence’.
(v) ‘Inquiry’, ‘investigation’ and ‘trial’.
(vi) ‘Mortgage’ and ‘charge’ . (4 marks each)
Answer 4(i)
Judgement, Decree and Order
“Judgement” as defined in Section 2(9) of the Civil Procedure Code means the
statement given by the Judge on the grounds of a decree or order. Thus, a judgement
must set out the grounds and reasons for the Judge to have arrived at the decision.
EP–GCL–December 2008 10
“Decree” is defined in Section 2(2) of the Code as (i) the formal expression of an
adjudication which, so far as regards the Court expressing it; (ii) conclusively; (iii)
determines the rights of the parties; (iv) with regard to all or any of the matters in
controversy; (v) in the suit and may be either preliminary (i.e. when further proceedings
have to be taken before disposal of the suit) or final.
“Order” as set out in Section 2(14) of the Code means the formal expression of any
decision of a Civil Court which is not a decree.
Answer 4(ii)
Set-off Counter-claim and Equitable set-off
Set-off : Order 8, Rule 6 deals with set-off which is a reciprocal acquittal of debts
between the plaintiff and defendant. It has the effect of extinguishing the plaintiff’s claim
to the extent of the amount claimed by the defendant as a counter claim.
Counter-claim : A defendant in a suit may, in addition to his right of pleading a set-
off under Rule 6, set up by way of counter-claim against the claim of the plaintiff, any
right or claim in respect of a cause of action accruing to the defendant against the
plaintiff either before or after the filling of the suit but before the defendant has delivered
his defence or before the time limited for delivering his defence has expired, whether
such counter-claim is in the nature of claim for damages or not. Such counter-claim
must be within the pecuniary jurisdiction of the Court. (Order 8, Rule 6A)
Equitable set-off : Sometimes, the defendant is permitted to claim set-off in respect
of an unascertained sum of money where the claim arises out of the same transaction,
or transactions which can be considered as one transaction, or where there is knowledge
on both sides of an existing debt due to one party and a credit by the other party found
on and trusting to such debt as a means of discharging it.
Answer 4(iii)
Appeal, Revision and Review
Right of appeal is not a natural or inherent right attached to litigation. Such a right is
given by the statute or by rules having the force of statute (Rangoon Botatoung Company
v. The Collector, Rangoon, 39 I.A. 197).
There are four kinds of appeals provided under the Civil Procedure Code:
(i) Appeals from original Decrees (Sections 96-99-Order 41)
(ii) Second Appeals (Sections 100-103-Order 42)
(iii) Appeals from Orders (Sections 104-106, 0.43 r. 1-2)
(iv) Appeals to the Supreme Court (Sections 109 and 112, Order 45)
Revision : Section 115 deals with 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, and if such subordinate Court appears—
(i) to have exercised a jurisdiction not vested in it by law, or
(ii) to have failed to exercise a jurisdiction so vested, or
 11 EP–GCL–December 2008
(iii) to have acted in the exercise of its jurisdiction illegally or with material irregularity,
the High Court may make such order as it thinks fit.
Review : The right of review has been conferred by Section 114 and Order 47
Rule 1 of the Code. It provides that any person considering himself aggrieved by a
decree or order may apply for a review of judgement to the court which passed the
decree or made the order on any of the grounds as mentioned in Order 47 Rule 1,
namely—
(i) 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
(ii) on account of some mistake or error apparent on the face of the record, or
(iii) for any other sufficient reason,
and the Court may make such order thereon as it thinks fit.
Answer 4(iv)
Cognizable Offence and Non-cognizable Offence
“Cognizable offence” means an offence for which, and “cognizable case” means a
case in which, a police officer may, in accordance with the First Schedule or under any
other law for the time being in force, arrest without warrant.
“Non-cognizable offence” means an offence for which, and “non-cognizable” case
means a case in which, a police officer has no authority to arrest without warrant.
A non-cognizable offence needs special authority to arrest by the police officer.
While in a “cognizable offence”, no authority is needed to arrest the accused.
Answer 4(v)
Inquiry, Investigation and Trial
Inquiry : It means every inquiry other than a trial, conducted under this Code by a
Magistrate or Court. [Section 2(g)]
— the inquiry is different from a trial in criminal matters;
— inquiry is wider than trial;
— it stops when trial begins.
Investigation : It includes all the proceedings under this Code for the collection of
evidence conducted by a police officer or by any person (other than a Magistrate) who is
authorised by a Magistrate in this behalf. [Section 2(h)]
Trial : Trial starts when formal charge has been framed against the accused and
proceedings ended with either conviction or acquittal by a competent Court.
Answer 4(vi)
Mortgage and Charge
According to Section 58 of the Transfer of Property Act, a “mortgage” is the transfer
of an interest in specific immoveable property for the purpose of securing the payment
EP–GCL–December 2008 12
of money advanced or to be advanced by way of loan, an existing or future debt or the
performance of an engagement which may give rise to pecuniary liability.
The transferor is called a mortgagor, the transferee a mortgagee. The principal money
and interest the payment of which is secured for the time being are called the mortgage
money and the instrument by which the transfer is effected is called a mortgage deed.
“Charge” has been defined under Section 100 as follows: “Where immoveable property
of one person is by the act of parties or operation of law made security for the payment
of money to another, and the transaction does not amount to a mortgage, the latter
person is said to have a charge on the property”.
As is evident from the above definition, a charge comes into existence either by the
act of parties or by operation of law.
Question 5
(a) Attempt any three of the following :
(i) When do the statements made under special circumstances become
relevant ?
(ii) Specify the manner in which requests may be made by a citizen to the
authority for obtaining information under the Right to Information Act, 2005.
(iii) What is a valid acknowledgement under the Limitation Act, 1963 ?
(iv) Explain the maxim injuria sine damnum. (4 marks each)
(b) Fill in the blank spaces with the appropriate nomenclature or terminology in the
following :
(i) A writ issued by the court to some person or body to compel it to perform a
public duty is called ___________.
(ii) 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 rule of interpretation is called ___________.
(iii) Attack on the reputation of a person is called ____________.
(iv) 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. This is known as
___________. (1 mark each)
Answer 5(a)(i)
The following statements become relevant on account of their having been made
under special circumstances:
(i) Entries made in books of account, induding those maintained in an electronic
form regularly kept in the course of business. Such entries, though relevant,
cannot, alone, be sufficient to charge a person with liability; (Section 34)
(ii) Entries made in public or official records or an electronic record made by a
public servant in the discharge of his official duties, or by any other person in
performance of a duty specially enjoined by the law; (Section 35)
 13 EP–GCL–December 2008
(iii) Statements made in published maps or charts generally offered for the public
sale, or in maps or plans made under the authority of the Central Government or
any State government; (Section 36)
(iv) Statement as to fact of public nature contained in certain Acts or notification;
(Section 37)
(v) Statement as to any foreign law contained in books purporting to be printed or
published by the Government of the foreign country, or in reports of decisions of
that country. (Section 38)
When any statement of which evidence is given forms part of a longer statement, or
of a conversation or part of an isolated document, or is contained in a document which
forms part of a book, or is contained in part of electronic record or of a connected
series of letters or papers, evidence shall be given of so much and no more of the
statement, conversation, document, electronic record, book or of letters or papers as
the Court considers necessary in that particular case to the full understanding of the
nature and effect of the statement, and of the circumstances under which it was made.
(Section 39)
Answer 5(a)(ii)
The Right to Information (RTI) Act, 2005 under Sections 6 & 7specifies the manner
in which requests may be made by a citizen to the authority for obtaining the information.
It also provides for transferring the request to the other concerned public authority who
may hold the information.
— Application is to be submitted in writing or electronically, with prescribed fee, to
Public Information Officer (PIO).
— Information to be provided within 30 days.
— 48 hours where life or liberty is involved.
— 35 days where request is given to Asst. PIO.
— Time taken for calculation and intimation of fees excluded from the time frame.
— No action on application for 30 days is a deemed refusal.
— If the interests of a third party are involved then time limit will be 40 days
(maximum period + time given to the party to make representation).
— No fee for delayed response.
Answer 5(a)(iii)
Valid Acknowledgement
As per Section 18 of the Act, following requirements should be present for a valid
acknowledgement:
1. There must be an admission or acknowledgement;
2. Such acknowledgement must be in respect of any property or right;
3. It must be made before the expiry of period of limitation; and
EP–GCL–December 2008 14
4. 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.
Answer 5(a)(iv)
Injuria sine damnum
It means injury without damage, i.e., where there is no damage resulted yet it is an
injury or wrong in tort, i.e. where there is infringement of a legal right not resulting in harm
plaintiff can still sue in tort.
Some rights or interests are so important that their violation is an actionable tort
without proof of damage. Thus when there is an invasion of an “absolute” private right of
an individual, there is an injuria and the plaintiff’s action will succeed even if there is no
damnum or damages. An absolute right is one, the violation of which is actionable per
se, i.e., without the proof of any damage. Injuria sine damno covers such cases and
action lies when the right is violated even though no damage has occurred. Thus, the
act of trespassing upon another’s land is actionable even though it has not caused the
plaintiff even the slightest harm.
Answer 5(b)
(i) Mamdamus
(ii) Harmonious construction
(iii) Defamation
(iv) Vicarious liability
Question 6
(a) Choose the most appropriate answer from the given options in respect of the
following :
(i) Secularism means that the State should —
(a) Have its own religion
(b) Ignore all religions
(c) Have all religions of its own
(d) Have no religion of its own.
(ii) The nature of remedy under the law of torts is —
(a) Criminal
(b) Civil
(c) Quasi-criminal
(d) Quasi-civil.
 15 EP–GCL–December 2008
(iii) When there are two types of evidence, one oral and another documentary,
which type of evidence shall prevail —
(a) Documentary
(b) Oral
(c) None
(d) Both (a) and (b).
(iv) The Transfer of Property Act, 1882 applies to —
(a) Movable property
(b) Immovable property
(c) Both (a) and (b)
(d) Only to testamentary dealings.
(v) “I do acknowledge myself to be indebted to Bhupesh in Rs.1,000 to be paid
on demand for value received”, is a —
(a) Bond
(b) Security
(c) Promissory note
(d) Agreement.
(vi) Every breach of contract gives rise to a cause of action and a suit may be
instituted to secure proper relief at the place —
(a) Where the contract was made
(b) Where the breach has occurred
(c) Where money is payable
(d) Any one of the above.
(vii) The defendant is entitled to ‘leave to defend’ in a summary suit if he enters
an appearance after service of summons within —
(a) 30 days
(b) 10 days
(c) 60 days
(d) 15 days.
(viii) A magistrate of the first class may pass a sentence of —
(a) imprisonment for a term not exceeding 10 years or of fine upto Rs.
10,000 or of both
(b) imprisonment for a term not exceeding 5 years or of fine upto Rs.20,0’00
or of both
(c) imprisonment for a term not exceeding 7 years or of fine upto Rs. 15,000
or of both
(d) imprisonment for a term not exceeding 3 years or of fine upto Rs. 5,000
or of both. (1 mark each)
EP–GCL–December 2008 16
(b) State, with reasons in brief, whether the following statements are correct or
incorrect :
(i) The time limit for making an application for setting aside an arbitral award is
2 months from the date of receipt of award.
(ii) Confession made before the magistrate by a co-accused against another
co-accused, who is not jointly tried with him for an offence, is admissible as
evidence.
(iii) The right to collect rents of immovable property has been recognised as
immovable property.
(iv) A declaratory decree is a decree passed to prevent the violation of a negative
act. (2 marks each)
Answer 6(a)
(i) (d) Have no religion of its own
(ii) (b) Civil
(iii) (a) Documentary
(iv) (c) Both (a) and (b)
(v) (c) Promissory Note
(vi) (d) Any one of the above
(vii) (b) 10 days
(viii) (d) Imprisonment for a term not exceed 3 years or of fine upto Rs.5,000 or of
both.
Answer 6(b)
(i) Incorrect : The time limit for making an application for setting aside an arbitral
award is three months from the date of receipt of award.
(ii) Incorrect : Confession made before the magistrate by a co-accused against
another co-accused, who is not jointly tried with him for an offence, is inadmissible
as evidence.
(iii) Correct : The right to collect rents of immovable property has been recognized
as immovable property.
(iv) Incorrect : A declaratory decree is a decree whereby any right as to any property
or legal character of a person is judicially ascertained.
Question 7
(a) A mill owner employed an independent contractor to construct a reservoir on his
land to provide water for his mill. There were old disused mining shafts under
the site of the reservoir, which the contractor failed to observe because they
were filled with soil. Therefore, the contractor did not block them. When water
 17 EP–GCL–December 2008
was filled in the reservoir, it burst through the shaft and flooded the plaintiffs
coal mines on the adjoining land. Is the mill owner liable to compensate for loss
or damage caused to the plaintiff ? Give reasons. (6 marks)
(b) There was a partition between a Hindu father and his five sons. The deed provided
that if any one of the sons wanted to sell his share, he shall sell it to one of his
brothers only and not to any stranger. The consideration for that share shall be
Rs. 1,000 only. Are these conditions valid ? Give reasons. (5 marks)
(c) Ajit transfers to Baljit for valuable consideration his reversionary interest in a
property. When Ajit succeeds to the property, Baljit sues for possession of the
same. Whether Baljit’s suit for possession will succeed ? Give reasons.
(5 marks)
Answer 7(a)
This problem is based on Rylands v. Flethcer (1868) L.R. 3 H.L. 330 regarding strict
or absolute liability in which harm to the plaintiff occurred without intention or negligence
on the defendant’s part.
In this case it was held that a man acts at his peril and is the insurer of the safety of
his neighbour against accidental harm. Such duty is absolute because it is independent
of negligence on the part of the defendant or his servants. If a person brings or
accumulates on his land anything which, if it should escape may cause damage to his
neighbours, he does so at his own peril….”
In this case mill owner will be liable for the compensation on the basis of strict
liability.
Answer 7(b)
Section 10 of Transfer of Property Act says that when property is transferred, the
transferee should not be restrained absolutely from alienating the property. One may
give property to another subject to a condition, but the condition should not be one which
absolutely prevents the transferee from alienating the property.
The given problem is based on Trichinpoly Varthaga Sangum v. Shunmoga Sunderam
(1939) Madras 954. In this case it was held that the condition absolutely prevented the
son from selling the property to any one for good value. In this case, the market value
of the property of the son was far greater than Rs.1,000. Hence, the condition was
declared invalid.
Answer 7(c)
Section 6 of the Transfer of Property Act lays down certain exceptions to the general
rule that property of any kind may be transferred. One of them is “the chance of an heir
apparent succeeding to an estate, the chance of a relation obtaining a legacy on the
death of a kinsman or any other mere possibility of a like nature cannot be transferred."
Under this clause possibilities referred are bare or naked possibilities and not coupled
with an interest such as contingent remainders or future interest-also known as right of
spes successionis which cannot be the subject to transfer. When a person is the owner
of property, the property is in existence and it is in his possession. This he may transfer.
EP–GCL–December 2008 18
But if property is neither in existence nor is the person owner of the property, then it
cannot be transferred.
Similarly, the chance of an heir apparent succeeding to the estate of a deceased
person cannot be transferred.
Baljit’s suit for possession will not succeed as the reversionary interest is a spes
successionis and non-transferable. So the transfer is void and Baljit’s suit for possession
fails.
Question 8
(a) Atul was.running a school at a certain place. Ali started another school near the
school of Atul. As a result of this, most of the students of Atul’s school left his
school and joined Ali’s school. Due to competition, Atul had to reduce the fees
by Rs.40 per student per quarter and thus he suffered huge monetary loss. Atul
filed a suit against Ali in the court for compensation. Is the suit instituted by
Atul maintainable ? Give reasons by referring to relevant case law.
(6 marks)
(b) Abhay’s agricultural land was purchased by the government for the purpose of
construction of a factory but no duty was paid for this transfer by the government.
Abhay wanted to take back his land on the ground that government has not
paid the duty and, therefore, no sale deed was executed. Will Abhay succeed ?
Give reasons. (5 marks)
(c) A document was executed by several persons at different times. The person in
whose favour such execution was made, presented the document for re-
registration after expiry of three months. Whether such documents can be
registered and if yes, within what period ? (5 marks)

Answer 8(a)

No action will lie. The present case is based on the leading case of Gloucester
Grammer School (1410) Y.B. Hill-11 Hen of 47 pp.21, 36.

Under the law of torts, it is not every damage that is a damage in the eyes of law. It
must be a damage which the law recognizes as such. There are two maxims namely-
Damnum sine injuria’ and injuria sine damnum that explain this proposition.

The given problem comes under the purview of maxim damnum sine injuria. Damnum
means harm, loss or damage in respect of money, comfort, health etc. Injuria means
infringement of a right conferred by law on the plaintiff. The maxim means that in a given
case, a man may have suffered damage and yet has no action in tort, because the
damage is not to an interest protected by the law of torts. Therefore causing damage
however substantial to another person is not actionable in law unless there is also a
violation of the legal right of the plaintiff. Common examples are where damages result
from an act done in the exercise of legal rights.

In the given case, the suit filed by Atul is not maintainable because Ali is exercising
his legal right and the monetary loss suffered by Atul has resulted from an act done in
the exercise of Ali’s legal right.
 19 EP–GCL–December 2008
Answer 8(b)
“Abhay” will not succeed.
Section 3 of the Indian Stamp Act, 1899 charges instruments with duty specified
therein. At the same time, it inter-alia provides that no duty shall be chargeable in
respect of any instrument executed by or on behalf of or in favour of the Government, in
cases where, but for this the Government would be liable to pay the duty chargeable in
respect of such instrument.
Hence, in the present case, sale deed will supposed to be effective and Abhay will
not succeed.
Answer 8(c)
The document can be registered. Section 24 of the Registration Act, 1908 says, a
document executed by several persons at different times may be presented for registration
and re-registration within four months from the date of each execution.
In the given case, the document has been presented for re-registration after the
expiry of three months only of its execution. Therefore, the said document can be
registered.
EP – CACMA – December 2008 20
COMPANY ACCOUNTS
COST AND MANAGEMENT ACCOUNTING
Time allowed : 3 hours Maximum marks : 100
NOTE : All working notes should be shown distinctly.

PART A
(Answer Question No. 1 which is compulsory
and any two of the rest from this part)
Question 1
(a) State, with reasons in brief, whether the following statements are correct or
incorrect:
(i) The bonus share issue cannot be made unless the existing partly-paid shares
are fully paid-up.
(ii) In India, corporate financial statements in general do not include a cash
flow statement to explain movement of cash during the accounting period.
(iii) A company is not under any legal obligation to make good its past losses
before distributing its current profits as dividends.
(iv) The Accounting Standard-21 mandates an Indian company to present
consolidated financial statements.
(v) In India, corporate financial statements are prepared recognising legal forms
of the transaction and ignoring the substance. (2 marks each)
(b) Choose the most appropriate answer from the given options in respect of the
following :
(i) Securities premium money can be used for ––
(a) Payment of dividend
(b) Writing off goodwill
(c) Issuance of fully paid bonus shares
(d) None of the above.
(ii) Loss suffered from the date of acquisition of business to the date of
incorporation should be debited to ––
(a) Goodwill account
(b) Profit and loss account
(c) Capital reserve account
(d) Capital reduction account.
(iii) Pre-paid expenses are shown in balance sheet as ––
(a) Current assets
(b) Intangible assets
(c) Wasting assets
(d) Fixed assets.

20
 21 EP – CACMA – December 2008
(iv) The balance of forfeited shares after reissue of the same is transferred to—
(a) Capital reserve account
(b) Share capital account
(c) Profit and loss account
(d) Debenture redemption fund account.
(v) Divisible profits include ––
(a) General reserves
(b) Profit on revaluation of assets
(c) Profit prior to incorporation period
(d) Capital reserve. (1 mark each)
(c) Re-write the following sentences after filling-up the blank spaces with appropriate
word(s)/figure(s) :
(i) Accounting as a ‘language of business’ communicates the financial results
of corporate enterprise to various________ by means of financial statements.
(ii) If a company offers to its equity shareholders the right to buy one equity
share of Rs.100 each at Rs.120 for every 4 equity share of Rs.100 each
and the market value of a share is Rs.180, then the value of the right is
Rs.________ .
(iii) The bonus share can be issued only if _________ of the company permits
such an issue.
(iv) Accounting Standard-17: Segment reporting is mandatory for all commercial,
industrial and business reporting corporate enterprises, whose turnover for
the accounting period exceeds Rs. _______.
(v) Consolidated financial statements are presented by a _______ company to
provide financial information about the economic activities of its group.
(1 mark each)
Answer 1(a)
(i) Correct - The bonus shares are always fully paid-up and issued to existing
shareholders on a pro-rata basis. Bonus issue is not made unless the partly
paid shares, if any, existing are made fully paid up.
(ii) Correct – The preparation and presentation of cash flow statement in India is
not mandatory for all types of corporate enterprises. However the companies
which are required to prepare and present such statements should prepare and
present cash flow statements as per revised Accounting Standard (AS) - 3.
(iii) Incorrect - In general a company is under no legal obligation to make good a
debit balance in its profit and loss account resulting from past losses before
distributing its current profits. But so much of the loss sustained by a company
in the past years as is attributable to the amount of provisions made for
depreciation must be set off against the current profit of the company before a
dividend is declared. But from the view point of sound commercial policy, it is
desirable to apply current profits in making good lost capital before distribution
of dividends.
EP – CACMA – December 2008 22
(iv) Incorrect - The Companies Act, 1956 does not make it obligatory on the part of
the holding company to prepare group accounts or consolidated accounts. In
case, if a holding company prepares and present consolidated financial
statements, it has to follow the principles and procedures as laid down under
Accounting Standard (AS) - 21.
(v) Incorrect - Transactions and other events are accounted for and presented in
accordance with their substance and financial reality and not merely with their
legal form. While the legal form of a lease agreement is that the lessee may
acquire no legal title to the leased asset, in the case of financial leases, the
substance and financial reality are that the lessee acquires the economic benefits
of the use of the leased assets for the major part of its economic life. Therefore,
a financial lease is recognized in the lessee’s balance sheet both as an asset
and as an obligation to pay future lease payments.
Answer 1(b)
(i) (c) Issuance of fully paid bonus shares
(ii) (a) Goodwill account
(iii) (a) Current assets
(iv) (a) Capital reserve account
(v) (a) General reserves
Answer 1(c)
(i) Accounting as a ‘language of business’ communicates the financial results of
corporate enterprise to various interested parties / stakeholders by means of
financial statements.
(ii) If a company offers to its equity shareholders the right to buy one equity share
of Rs.100 each at Rs.120 for every 4 equity share of Rs.100 each and the
market value of a share is Rs.180, then the value of the right is Rs. 12.
(iii) The bonus share can be issued only if Articles of Association of the company
permits such an issue.
(iv) Accounting Standard-17: Segment reporting is mandatory for all commercial,
industrial and business reporting corporate enterprises, whose turnover for the
accounting period exceeds Rs. 50 crores .
(v) Consolidated financial statements are presented by a holding company to
provide financial information about the economic activities of its group.
Question 2
(a) Write short notes on any two of the following :
(i) Objectives of international accounting standards
(ii) Loss on issue of debentures
(iii) Firm underwriting. (3 marks each)
 23 EP – CACMA – December 2008
(b) Following is the balance sheet of Anupam Ltd. as on 31st March, 2008 :
Liabilities Rs.
2,00,000, 14% Preference shares
of Rs.100 each, fully called 2,00,00,000
Less : Calls in arrears @ Rs. 20 per share 4,00,000 1,96,00,000
10,00,000 Equity shares of Rs.10
each, Rs.8 per share called 80,00,000
Less : Calls-in-arrears 20,000
79,80,000
Add : Calls-in-advance 10,000 79,90,000
Securities premium 5,10,000
General reserve 1,50,00,000
10,000, 15% Debentures @ Rs.1,000 each, fully paid 1,00,00,000
Current liabilities and provisions 10,00,000
5,41,00,000
Assets
Fixed assets 1,30,00,000
Investments 28,00,000
Other current assets 2,15,00,000
Cash and bank balances 1,68,00,000
5,41,00,000
On 1st April, 2008, the Board of directors decided that ––
(i) The fully paid preference shares are to be redeemed at a premium of 4% on 1st
May, 2008 and for that purpose 6 lakh equity shares of Rs.10 each are to be
issued at a premium of 5%.
(ii) 3,000 Equity shares owned by Mohan, an existing shareholder, who has failed
to pay the allotment money and the first call money @ Rs.3 and Rs.2.50 per
share respectively, equity shares are to be forfeited on 31st May, 2008.
(iii) The final call of Rs.2 per share is to be made on 7th July, 2008 on equity
shares.
All the above are duly complied with according to schedule. The amount due on the
issue of fresh issue and on final call are also duly received except from Sohan who
had failed to pay the first call for his 1,400 equity shares, has again failed to pay the
final call also. These shares of Sohan are to be forfeited on 31st August 2008.
Show the necessary journal entries. (9 marks)
Answer 2(a)(i)
Objectives of International Accounting Standards
The International Accounting Standards are formulated by International Accounting
Standards Board (IASB). The IASB has issued International Accounting Standards on
EP – CACMA – December 2008 24
various matters relating to accounting policies, preparation and disclosure of financial
statements. The main objectives of these standards is to bring uniformity and enhance
inter-firm comparability pertaining to –
(i) Recognition of transaction in financial statements.
(ii) Measurement of these transactions and events.
(iii) Presentation of these transactions and events in the financial statements in a
manner that is meaningful and understandable to the users in making economic
decisions across the frontiers.
The IASB has issued 41 International Accounting Standards (some of them were
withdrawn) in addition to 8 International Financial Reporting Standards. The last decade
has witnessed a sea change in the global economic scenario. It is now recognized by all
that differences among countries in financial accounting and reporting practices are a primary
impediment to the free flow of capital. In view of this, the Institute of Chartered Accountants
of India has decided in principle to enforce the convergence of Indian Accounting Standards
with International Financial Reporting Standards from 1st April, 2011.
Answer 2(a)(ii)
Loss on issue of debentures
If a company issues debentures at par or at a discount which are redeemable at a
premium, the premium payable on redemption of the debentures should be treated as
capital loss. Redemption of debentures at a premium is a known loss at the time of
issue of debentures as the terms of issue generally contain such provisions for
redemptions. As such, it would be prudent on the part of the company to write off such
loss during the life of the debentures. The loss to be incurred by a company for a
particular issue of debentures is ascertained in the following manner :
1. If the debentures are issued at par and redeemable at a premium, the loss will
be equal to the amount of premium payable on redemption.
2. If the debentures are issued at a discount and redeemable at a premium, the
loss will be equal to the total amount of discount on issue and the amount of
premium on redemption. In such a case, there is no need to debit discount on
Issue of Debenture Account. Instead, “Loss on Issue of Debenture Account”
should be debited with total loss.
Loss on issue of debentures account is written off gradually every year during the
life of the debentures. The unwritten off amount is shown in the balance sheet under
‘Miscellaneous Expenditure Account’.
Answer 2(a)(iii)
Firm underwriting
Firm underwriting refers to a definite commitment by the underwriter or underwriters
to take up an agreed number of shares or debentures of a company irrespective of the
number of shares or debentures subscribed by the public. In such an instance, the
underwriters are committed to take up the agreed number of shares or debentures in
addition to unsubscribed shares or debentures, if any. Even if the issue is oversubscribed,
the underwriters are liable to take up the agreed number of shares or debentures.
 25 EP – CACMA – December 2008
While computing the individual liability of the underwriters, the ‘firm underwriting’
can be dealt with in any of the following manner in the absence of any specific
instructions:
(a) The ‘firm underwriting’ may be adjusted against the individual liability of each
underwriter separately or may be treated at par with marked applications.
In such a case, the statement of liability of underwriters will be as under:
Gross Liability (agreed ratio-total shares underwritten) xxxx
Less : Marked applications including firm underwriting xxxx
Balance left
Less : Unmarked application (ratio of gross liability) xxxx
Net liability
Add : Firm underwriting xxxx
Total Liability xxxx
(b) The benefit of ‘firm underwriting’ may be shared by all underwriters or firm
underwriting may be treated at par with unmarked applications. In such case,
the shares/debentures underwritten firm will be included in the unmarked forms.
In such case, the state of liability of underwriters will appear as shown above
except that shares/debentures underwritten firm by each underwriter will not be
specifically adjusted against his individual liability but will be included in the
total unmarked forms to be distributed amongst all underwriters in the ratio of
their gross liability.
Answer 2(b)
Journal Entries
Date Particulars Dr. (Rs.) Cr.(Rs.)

2008 Bank A/c Dr.

May 1 To Equity Share Capital A/c 63,00,000
To Securities Premium A/c 60,00,000
(Being Equity Shares issued at premium 3,00,000
Securities Premium A/c Dr. 7,20,000
To Premium on Redemption of Redeemable
Preference Shares A/c 7,20,000
(Being Premium on Redemption of
Preference shares provided)
General Reserve A/c Dr. 1,20,00,000
To Capital Redemption Reserve A/c 1,20,00,000
(Being capital redemption reserve account
created)
14% Preference Share Capital A/c Dr. 1,80,00,000
Premium on Redemption A/c Dr. 7,20,000
To Preference Shareholders A/c 1,87,20,000
(Being amount due to preference
shareholders)
EP – CACMA – December 2008 26

Date Particulars Dr. (Rs.) Cr.(Rs.)

Preference Shareholders A/c Dr. 1,87,20,000

To Bank A/c 1,87,20,000
(Being paid to preference shareholders)
May 31 Equity Share Capital A/c Dr. 24,000
To Equity Share Allotment A/c 9,000
To Equity Share 1st Call A/c 7,500
To Forfeited Shares A/c 7,500
(Being 3,000 shares forfeited due to non-
payment of calls)
July 7 Equity Share Final Call A/c Dr. 19,94,000
To Equity Share Capital A/c 19,94,000
(Being final call due on equity shares)
Bank A/c Dr. 19,81,200
Calls in Advance A/c Dr. 10,000
To Equity Share Final Call A/c 19,91,200
(Being Final Call received on Equity
Shares)
Aug.31 Equity Share Capital A/c Dr. 14,000
To Equity Share 1st Call A/c 3,500
To Equity Share 2nd Call A/c 2,800
To Forfeited Shares A/c 7,700
(Being 1,400 shares forfeited due to
non-payment of calls)

Question 3
(a) Comment on any two of the following statements :
(i) As a matter of prudence, whole of free reserves should not be utilised in the
case of buy-back of shares.
(ii) As a matter of sound commercial policy, current profits are to be applied
while ‘paying dividend out of current profits without making good past losses.’
(iii) In case of under-subscription of shares, question of returning the money
does not arise at all. (3 marks each)
(b) Following are the balance sheets of Asha Ltd. and Bipasha Ltd. as on
31st March, 2008 :
Liabilities Asha Ltd. Bipasha Ltd.
(Rs.) (Rs.)
Capital (Rs.10 per share) 10,00,000 8,00,000
Profit and loss account 4,00,000 2,00,000
Loan from Asha Ltd. –– 80,000
Bills payable 80,000 60,000
14,80,000 11,40,000
 27 EP – CACMA – December 2008
Assets
Machinery 3,00,000 2,80,000
Furniture 50,000 20,000
Debtors 2,50,000 8,00,000
Loan to Bipasha Ltd. 80,000 ––
Shares in Bipasha Ltd. 7,00,000 ––
Bills receivable 1,00,000 40,000
14,80,000 11,40,000
Asha Ltd. purchased 75% shares of Bipasha Ltd. for Rs.7,00,000 on
31st March, 2008. Bills payable of Bipasha Ltd. include bills of Rs.20,000
accepted in favour of Asha Ltd.
Prepare a consolidated balance sheet. (9 marks)
Answer 3(a)(i)
Section 77A of the Company (Amendment) Act, 1999 states that a company may
purchase its own shares or other specified securities (e.g. employees’ stock option or
other securities as may be notified by the Central Government from time to time) out of:
(i) its free reserves (i.e. reserves which are free for distribution as dividend) and
includes balance of securities premium account or/ and
(ii) the proceeds of any shares or other specified securities.
However, as a matter of prudence, the entire free reserve should not be utilized for
the purpose of buy-back and the following items should be adjusted against free reserves
to arrive at the net amount of free reserves that can be utilized for the purpose of buy-
back:
(1) Unamortised miscellaneous expenditure.
(2) Unamortised deferred revenue expenditure.
(3) Contingent liabilities likely to mature and not provided for.
(4) Purchased goodwill.
(5) Any diminution of long-term investments not provided for.
(6) Any impairment in the value of tangible assets not provided for.
Answer 3(a)(ii)
A company is under no legal obligation to make good a debit balance in its Profit and
Loss Account resulting from past losses before distributing current profits. But so much
of the loss sustained by a company in the past financial year and years falling after 28th
December, 1960 as is attributable to the amount of provision made for depreciation,
must be set off against the current profits of the company before a dividend is declared.
The position in respect of set off of past losses for determining divisible profits may be
summarized as under:
(1) In respect of previous years ending before 28th December, 1960, arrears of
depreciation need not be taken into account.
EP – CACMA – December 2008 28
(2) In respect of previous years, ending after 28th December, 1960 :
(a) All arrears of depreciation not provided for must be set off against the profits
of the current year;
(b) The losses of such years must be set off to the extent to which they consist
of depreciation provided in the books.
But from the view point of sound commercial policy, however, it is desirable to
apply current profits in making good lost capital.
Answer 3(a)(iii)
In practical situations, it rarely happens that the number of shares applied for is
exactly equal to the number of shares offered to public for subscription. In case of
under-subscription of shares, number of shares applied for, is less than the number of
shared offered by the company. All applications are accepted in full. If the minimum
subscription has not been subscribed, all application money may be required to be
returned. However, in case of over-subscription of shares, the company returns the
money to the applicants whose applications have either been rejected or have been
accepted partially. Hence, in case of under-subscription, the question of returning the
money does not arise at all.
Answer 3(b)
Consolidated Balance Sheet of Asha Ltd. And Bipasha Ltd.
As on 31st March, 2008

Liabilities Rs. Rs. Assets Rs. Rs.

Share Capital: Machinery :

Shares of Rs. 10 each 10,00,000 Asha Ltd. 3,00,000
Minority Interest 2,50,000 Bipasha Ltd. 2,80,000 5,80,000
Reserve and Surplus: Furniture :
Profit and Loss A/c 4,00,000 Asha Ltd. 50,000
Capital Reserve 50,000 Bipasha Ltd. 20,000 70,000
Current Liabilities : Debtors :
Loan from Asha Ltd. 80,000 Asha Ltd. 2,50,000
Less : Inter Co.debts 80,000 Nil Bipasha Ltd. 8,00,000 10,50,000
Bills payable Loan to
Bipasha Ltd. 80,000
Asha Ltd. 80,000 Less : Inter Co.
debts 80,000 Nil
Bipasha Ltd. 60,000 Bills Receivables :
1,40,000 Asha Ltd. 1,00,000
Less : Inter Co.debts. 20,000 1,20,000 Bipasha Ltd. 40,000
1,40,000
Less: Inter Co.debts 20,000 1,20,000
18,20,000 18,20,000
 29 EP – CACMA – December 2008
Working Notes :
1. Allocation of capital profit of Bipasha Ltd.
Rs.
Profit & Loss Account balance as on 31.3.2008 2,00,000
Share of Asha Ltd. – 75% 1,50,000
Share of Minority Shareholders 50,000
2. Calculation of Capital Reserve :
Paid-up value of shares 6,00,000
Share of capital profit 1,50,000
7,50,000
Less : Cost of shares 7,00,000
Capital reserve 50,000
3. Calculation of Minority Interest :
Paid up Values of shares 2,00,000
Share of Capital Profit 50,000
2,50,000
Question 4
(a) Distinguish between any two of the following :
(i) ‘Underwriters’ and ‘brokers’.
(ii) ‘Marked applications’ and ‘unmarked applications’.
(iii) ‘Calls-in-arrears’ and ‘calls-in-advance’. (3 marks each)
(b) Following is the balance sheet of Ramesh Ltd. as on 31st March, 2008 :
Liabilities Rs.
Equity shares of Rs.10 each 10,00,000
12% Preference shares of Rs.100 each 10,00,000
General reserve 6,00,000
Profit and loss account 4,00,000
15% Debentures 10,00,000
Creditors 8,00,000
48,00,000
Assets
Goodwill 5,00,000
Building 15,00,000
Plant 10,00,000
EP – CACMA – December 2008 30
Investment in 10% stock (market value of
Rs.5,20,000, nominal value Rs. 5,00,000) 4,80,000
Stock 6,00,000
Debtors 4,00,000
Cash 1,00,000
Preliminary expenses 2,20,000
48,00,000
Additional information —
Assets are revalued as follows:
Building : Rs.32,00,000; Plant : Rs.18,00,000; Stock : Rs.4,50,000; and
Debtors : Rs.3,60,000.
Average profit before tax of the company is Rs.12,00,000 and 12.5% of the profit is
transferred to general reserve, rate of taxation being 50%. Normal dividend expected
on equity shares is 8% while fair return on capital employed is 10%. Goodwill may
be valued at 3 years’ purchase of super profits.
Ascertain the value of each equity share under fair value method. (9 marks)
Answer 4(a)(i)
Underwriters and brokers
The persons or institutions underwriting a public issue of shares or debentures are
called ‘underwriters’. The underwriters may be individuals, partnership firms or joint
stock companies. But, an issue of shares or debentures is hardly underwritten by a
single individual as it involves more risk and attaches greater responsibility. Generally,
an issue of shares or debentures of a company is underwritten by two or more firms
jointly. The consideration payable to the underwriters for underwriting the issue is known
as underwriting commission. Some specialized financial institutions set-up by the
Government in the public sector are also playing an active role these days in underwriting
shares or debentures of a company.
Brokers merely promise or try to procure subscriptions to the shares or debentures
issued; they do not take any responsibility of subscribing to the shares or debentures of
the company. They simply procure subscriptions for shares or debentures from the
public on behalf of the company and in exchange of their service rendered to the company,
they get remuneration called brokerage.
Answer 4(a)(ii)
Marked applications and unmarked applications
When the issue of shares or debentures of a company is underwritten by two or
more persons, it is usual that the applications for shares or debentures sent through the
underwriters should bear a stamp of the respective underwriters. The applications bearing
the stamp of the respective underwriters are called “marked applications” while the
applications received directly by the company which do not bear any stamp of the
underwriters are called “unmarked applications”.
 31 EP – CACMA – December 2008
If the entire issue of shares or debentures is underwritten by only one underwriter,
the marking of applications is immaterial. But, the issue of shares or debentures is
generally underwritten by more than one underwriter as the risk is distributed among the
underwriters in an agreed ratio. In such a case it is essential that the applications sent
through the underwriters should be marked properly so as to determine their respective
liability correctly. The purpose of distinguishing between marked and unmarked
applications is to determine the liability of individual underwriters.
Answer 4(a)(iii)
Calls-in-arrears and Calls-in-advance
Calls-in-arrears refers to the amount called up by-the company which has not yet
been paid by the shareholders till the last day fixed for payment thereof. The amount of
calls-in-arrears is shown by way of deduction from the called-up capital in the Balance
Sheet. Generally interest is charged on calls-in-arrears. The maximum rate of interest as
per Table A is 5% p.a. The interest on calls-in-arrears account is transferred to the Profit
and Loss Account at the end of the year.
Calls-in-advance refers to the amount paid by the shareholders in excess of the
amount due from them. A company may accept calls-in-advance only if Articles authorize
to do so. Interest is allowed on calls-in-advance. The amount of calls-in-advance is
shown under separate heading on the Liabilities Side of the Balance Sheet. The maximum
rate of interest as per Table A is 6% p.a. It is a debt of a company until, the calls are
made and the amount already paid is adjusted. It is to be noted that the money received
on calls-in-advance does not become part of share capital. No dividend is paid on calls-
in-advance.
Answer 4(b)
Rs. Rs.
Assets :
Building 32,00,000
Plant 18,00,000
Stock 4,50,000
Debtors 3,60,000
Cash 1,00,000
59,10,000
Less : Liabilities :
Creditors 8,00,000
Debentures 10,00,000 18,00,000
Capital Employed 41,10,000
Calculation of Actual Profit :
Average Profit 12,00,000
Less : Income from Investment 50,000
11,50,000
EP – CACMA – December 2008 32
Rs.
Less : Income Tax 50% 5,75,000
Actual Profit 5,75,000
Less : Transfer to Reserve 12.50% 71,875
5,03,125
Less : Preference Dividend 1,20,000
Profit for Equity Shareholders 3,83,125
Super Profit = Actual Profit – Normal Profit
Normal Profit (Return) = 10% on Capital Employed
= Rs.41,10,000 x 10% = Rs. 4,11,000
Super Profit = Rs. 5,75,000 – Rs. 4,11,000 = Rs. 1,64,000
Goodwill = Rs.1,64,000 x 3 = Rs.4,92,000
Net assets for equity shareholders = Capital Employed + Goodwill + Investment –
Preference Capital
= Rs.41,10,000 + Rs.4,92,000 + Rs. 4,80,000 – Rs. 10,00,000 = Rs. 40,82,000
Value per share (intrinsic value) = Rs. 40,82,000 / 1,00,000 = Rs. 40.82
Expected rate of dividend x Paid up Value
Value per share yield method =
Normal rate of dividend
Rs. 3,83,125 x 100
Expected rate of dividend = = 38.31%
Rs. 10,00,000

38.31 x 10
Value per Share = = Rs.47.89
8
Intrinsic value + Yield value
Value per share as per fair value method =
2
Rs. 40.82 + Rs. 47.89
=
2
= Rs.44.36 approx.
Note :
(i) Debentures are excluded from capital employed for calculating super profit.
(ii) Normal profit is calculated on capital employed. It may also be calculated on
average capital employed, then answers will change accordingly.
PART B
(Answer Question No. 5 which is compulsory
and any two of the rest from this part.)
Question 5
(a) State, with reasons in brief, whether the following statements are true or false :
(i) Cost accounting is a branch of financial accounting.
 33 EP – CACMA – December 2008
(ii) Bin card shows the value of a material at any moment of time.
(iii) In absorption costing, the valuation of inventories is higher than in marginal
costing technique.
(iv) A budget manual is a summary of all the financial budgets.
(v) Cost reduction is cost control. (2 marks each)
(b) Choose the most appropriate answer from the given options in respect of the
following :
(i) Administration overheads are recovered as a percentage of ––
(a) Direct materials
(b) Direct wages
(c) Prime cost
(d) Works cost.
(ii) For contracts which are very near to completion, the profit is ascertained by
the formula ––
(a) Estimated profit x Work certified / contract price
(b) Estimated profit x Work certified / contract price x cash received /
Work certified
(c) Estimated profit x Work certified / contract price x cost of work / Total
cost to date
(d) Any of the above in the absence of specific instruction.
(iii) The type of process loss that should not affect the cost of inventories is –
(a) Abnormal loss
(b) Normal loss
(c) Seasonal loss
(d) Standard loss.
(iv) Cost-Volume-Profit analysis is most important for the determination of the—
(a) Volume of operations necessary to break-even
(b) Variable revenues necessary to equal fixed costs
(c) Relationship between revenues and costs at various levels of operation
(d) Sales volume necessary to equal fixed costs.
(v) For shoe manufacturers, the most suitable cost system is ––
(a) Job costing
(b) Batch costing
(c) Contract costing
(d) None of the above. (1 mark each)
(c) Re-write the following sentences after filling-up the blank spaces with appropriate
word(s)/figure(s) :
(i) Cost is a fact whereas price is a __________.
EP – CACMA – December 2008 34
(ii) Imputed costs are relevant for _________.
(iii) A __________ is the cost that has already been incurred and cannot be
avoided by decisions taken in the future.
(iv) Economic lot size is the order size that _________ the total cost of ordering
and storing.
(v) A profit centre is a division or organisational unit concerned with controlling
both _________ and costs. (1 mark each)
Answer 5(a)
(i) False : Cost accounting is a specialized branch of accounting and not of financial
accounting. Its main purpose is recording, ascertainment, analysis and
presentation of cost information pertaining to a product or a service unit.
(ii) False : Bin card shows only the quantity of material and not its value. This
card is prepared by stores department. It details out only quantity of material
available at a moment of time.
(iii) True : This is so because stock in absorption costing is valued at total cost
basis. The stock is valued at variable cost in case of marginal costing.
(iv) False : A budget manual lays down the details of the organizational set up,
duties and responsibilities of executives at different layers.
(v) False : Cost reduction and cost control, are two different approaches for
enhancing efficiency. Their concepts and procedures are quite different.
Answer 5(b)
(i) (d) Works cost.
(ii) (a) Estimated Profit x Work Certified / Contract Price
Or (d) Any of the above in the absence of specific instruction.
(iii) (a) Abnormal loss
(iv) (c) Relationship between revenues and costs at various levels of operation.
(v) (b) Batch costing.
Answer 5(c)
(i) Cost is a fact whereas price is a policy.
(ii) Imputed costs are relevant for decision making.
(iii) A sunk cost is the cost that has already been incurred and cannot be avoided
by decisions taken in the future.
(iv) Economic lot size is the order size that minimizes the total cost of ordering
and storing.
(v) A profit centre is a division or organizational unit concerned with controlling both
sales / (revenue) and costs.
 35 EP – CACMA – December 2008
Question 6
(a) Write short notes on any two of the following :
(i) Bases of apportionment
(ii) Cost plus contracts
(iii) Labour turnover. (3 marks each)
(b) A factory is currently working at 50% capacity and produces 1,000 units. From
the following information, you are required to estimate profits of the factory
when it works at 60% and 80% working capacity respectively and offer your
critical comments:
At 60% working capacity, raw material cost increases by 2% and selling price
falls by 2%. At 80% working capacity, raw materials cost increases by 5% and
selling price falls by 5%. At 50% capacity working, the product costs Rs.180 per
unit and is sold at Rs.200 per unit. The unit cost of Rs.180 is made up as follows :
Rs.
Raw material 100
Labour 30
Factory overheads 30 (40% fixed)
Administration overheads 20 (50% fixed) (9 marks)
Answer 6(a)(i)
Bases for apportionment
The following are the various bases for the apportionment of the overhead expenses
among the various cost centres :
(a) Direct Wages - Under this method overheads are distributed among the centre
in proportion to the direct wages of the respective centres,
(b) Number of Workers - Under this method the total number of workers working in
each centre forms the basis.
(c) Direct Labour Hours - The overhead cost is distributed in the proportion to the
centres in the proportion of the total number of hours worked in each centre.
(d) Floor Area - The relative area of the cost centre is used as a basis for
apportionment of certain expenses-like rent, rates, taxes, heating, lighting, air
conditioning, etc.
(e) Machine Hours - Machine hour rate indicates the cost per hour of the machine
used.
Answer 6(a)(ii)
Cost Plus contracts
Cost Plus contract is a contract in which the value of the contract is ascertained by
adding a certain percentage of profit over the total cost of the work. In other words, it is
a pricing method, under which contractee agrees to reimburse the actual cost plus the
agreed percentage of profit. This is used in case of those contracts whose exact cost
cannot be correctly estimated at the time of undertaking a work. This method is usually
adopted in the works of construction during war time, urgent works, defence, public
EP – CACMA – December 2008 36
utility works, ship building, etc. Government and Semi Government organizations usually
adopt the cost plus contracts to assign works. Generally, in such contract, contractor
and contractee have clear agreement, about the items of cost to be included, type of
material to be used, labour rates for different grades, etc.

Following are the benefits of cost plus contracts :

1. It is possible to know the cost of contract, cost per each element and the
amount of profit to the contractor.
2. The contractor carries on the work promptly and expeditiously.
3. When the works are to be carried out urgently and the value of the contract is
high, the cost-plus contract method is usually adopted.
4. The contractee can exercise an effective control over the work at different stages
as well as over the various elements of cost.
5. It assumes a fixed percentage margin profit to the contractor.
6. The contractor is protected from wide fluctuations in the prices of the elements
of costs. He will also get benefits of escalation clause.
7. The benefit of social justice is also obtained by the method.
Answer 6(a)(iii)
Labour turnover
The rate of change in the labour force is known as labour turnover. It is the ratio at
which the employees leave the concern during a given period in relation to the average
number of workers employed during a period. It can be measured by relating the
engagements and losses in the labour force to the total number employed at the beginning
of the period. All the losses must be taken into account regardless of the cause for
leaving. Labour turnover reduces the labour productivity and increases costs. The rate
of labour turnover depends on a number of factors, like, the nature of the industry, its
size, location, nature of labour, etc.
The commonly used techniques for measuring labour turnover is expressed by
the under noted formula :
1. Separation Rate Method
Separation during a given period
Labour turnover = x 100
Average number of workers during the period

2. Net Labour Turnover Rate Method or Replacement Method

Number of replacements during a given period
x 100
Average working force during the period

3. Labour Flux Rate Method

⎛ Number of separation ⎞ x ⎛ Number of new employees ⎞

⎜ during a period ⎟ ⎜ during a given period ⎟
⎝ ⎠ ⎝ ⎠ x 100
(Average number of workforce during the given period)
 37 EP – CACMA – December 2008
Answer 6(b)
Flexible Budget
Present Capacity – 50% - 1000 units

Cost 50% capacity 60% capacity 80% capacity

classi 1,000 units 1,200 units 1,600 units
fica- Per Total Rs. Per Total . Per Total Rs.
tion unit (000’s) unit Rs . unit (000’s)
Rs. Rs. (000’s) Rs.

Raw Materials V 100 100.0 102 122.4 105 168.0

Labour V 30 30.0 30 36.0 30 48.0

Factory
Overheads (60%) V 18 18.0 18 21.6 18 28.8

Adm.
Overheads (50%) V 10 10.0 10 12.0 10 16.0

Total Variable
Cost (V) 158 158.0 160 192.0 163 260.8
Sales (S – V) 200 200.0 196 235.2 190 304.0
Contribution 42 42.0 36 43.2 27 43.2
Factory Overheads F 12 12.0 10 12.0 7.50 12.0
Admn. Overheads F 10 10.0 8.33 10.0 6.25 10.0
Total Fixed Costs F 22 22.0 18.33 22.0 13.75 22.0
Total Cost (V+F) 180 180.0 178.33 214.0 176.75 282.8
Profit (Sales –
Total Cost) 20 20.0 17.67 21.2 13.25 21.2

The profit at 60% and 80% capacities is the same and as such, it is not advisable to
increase the production to 80%. However increase to 60% capacity is advisable.
Question 7
(a) What are the objectives of financial statement analysis ? (6 marks)
OR
“Although including interest in the normal cost is practically difficult but excluding
interest altogether may lead to wrong managerial decisions.” Comment.
(6 marks)
(b) A company has annual fixed cost of Rs.1,40,00,000. In the year 2007-08, sales
amounted to Rs.6,00,00,000 as compared with Rs.4,50,00,000 in the preceding
year 2006-07. Profit in 2007-08 is Rs.42,00,000 more than that in 2006-07. On
the basis of the above information, answer the following :
(i) At what level of sales, the company would have break-even ?
EP – CACMA – December 2008 38
(ii) Determine profit/loss on a forecasted sales volume of Rs.8,00,00,000.
(iii) If there is a reduction in selling price by 10% in the financial year 2008-09
and company desires to earn the same amount of profit as in 2007-08, what
would be the required sales volume ? (9 marks)
Answer 7(a)
Financial statement analysis is very much helpful in assessing the financial position
and profitability of a concern. The main objectives of analyzing the financial statement
are as follows :
(i) The analysis would enable the present and the future earning capacity and the
profitability of the concern.
(ii) The operational efficiency of the concern as a whole as well as department wise
can be assessed. Hence, the management can easily locate the areas of
efficiency and inefficiency.
(iii) The solvency of the firm, both short-term and long-term, can be determined with
the help of financial statement analysis which is beneficial to trade creditors
and debenture holders.
(iv) The comparative study in regard to one firm with another firm or one department
with another department is possible by the analysis of financial statements.
(v) Analysis of past results in respect of earning and financial position of the
enterprise is of great help in forecasting the future results. Hence it helps in
preparing budgets.
(vi) It facilitates the assessment of financial stability of the concern.
(vii) The long-term liquidity position of funds can be assessed by the analysis of
financial statements.
Answer to Alternate Question 7(a)
Interest is an element of cost and therefore, should be included in cost. Interest is
the cost to be paid for the use of capital; capital is also a factor of production just as
labour. If interest is not included in cost calculation, a number of managerial decisions
may be taken wrongly. Thus, where a decision involves replacement of labour with
expensive machinery, the question of interest assumes importance, since, if interest is
not included, the cost accountant may conclude that machinery is cheaper. In inventory
control, interest is an important item to be considered. Payment of interest depends
entirely on the financing policies and financing pattern. In reality, whether a firm raises
a certain sum of money from the proprietor or borrows from the outside does not make
any difference as far as production efficiencies are concerned. Thus, an amount of
notional interest may be charged on the total capital whether it is borrowed or not.
Another practical difficulty arises in the calculation of the amount of capital on
which interest should be worked out. While the fixed capital is readily ascertainable,
working capital keeps on changing. If notional interest is to be charged, the problem of
determining a proper rate of interest arises. In the money and capital markets, there is
a large number of rates depending upon different factors like risk, period of maturity,
bank rate, etc. By including interest on the proprietor’s capital amount by taking that
 39 EP – CACMA – December 2008
figure in the cost of production, we would obviously be including profit since the closing
stock will be valued at a higher figure.
Hence, it is true that there are practical difficulties in including interest as part of the
normal cost. However, excluding it altogether may lead to wrong managerial decisions
which are not desirable. Therefore, it is suggested that while interest may be excluded
from the regular cost sheet, cost calculations for other purposes for decision making
should include a proper amount of notional interest where the interest will be material.
Answer 7(b)
(i) P/V ratio = (Change in Profit / Change in Sales) x 100 or
= Rs. 42,00,000 / (Rs.6,00,00,000–Rs. 4,50,00,000) x 100 = 28%
Break Even Sales = Fixed Cost / (P/V Ratio)
= Rs. 1,40,00,000 / 28% = Rs. 5,00,00,000
(ii) Contribution for sales volume of Rs.8,00,00,000
= (PV Ratio x S) or 28% x Rs. 8,00,00,000 = Rs. 2,24,00,000
Therefore, Profit
= (Contribution – Fixed Cost) = Rs.(2,24,00,000 – 1,40,00,000) = Rs.84,00,000
(iii) Contribution in 2007-08 = 28% x Rs. 6,00,00,000 = Rs. 1,68,00,000
Sales in 2008-09 after reduction in price by 10%
= (Rs. 6,00,00,000 – 10% of Rs. 6,00,00,000) = Rs. 5,40,00,000
New PV Ratio = [Changed Contribution / Changed Sale] x 100
= (Rs. 1,68,00,000 – Rs. 60,00,000)/ Rs. 5,40,00,000 x 100 = 20%
The required sales volume for earning contribution of Rs.1,68,00,000
= (Required Contribution / New PV Ratio)
= (Rs. 1,68,00,000 / 20%) = Rs.8,40,00,000
Question 8
(a) Distinguish between any two of the following :
(i) ‘Budget period’ and ‘control period’.
(ii) ‘Cash’ and ‘cash equivalents’.
(iii) ‘Cost sheet’ and ‘production account’. (3 marks each)
(b) From the following information, prepare a cash flow statement showing net cash
flows from operating activities, investing activities and financing activities as
per Accounting Standard-3 (revised) :
Rs. in Lakhs
Net profit 25,000
Dividend paid (including dividend tax) 8,535
Book value of assets sold 185
Amortisation of capital grant 6
EP – CACMA – December 2008 40
Carrying amounts of investments sold 27,765
Interest expenses 10,000
Increase in working capital (excluding cash
and bank balances) 56,075
Expenditure on construction work-in-progress 34,740
Receipt of grant for capital projects 12
Proceeds from short term borrowings 20,575
Closing cash and bank balances 6,988
Provision for taxation 5,000
Income-tax paid 4,248
Loss on sale of assets 40
Depreciation charged 20,000
Profit on sale of investments 100
Interest on investments 2,506
Interest paid during the year 10,520
Purchase of fixed assets 14,560
Investment in joint venture 3,850
Proceeds from calls-in-arrears 2
Proceeds from long-term borrowings 25,980
Opening cash and bank balances 5,003
(9 marks)
Answer 8(a)(i)
Budget period and control period
A budget period should be distinguished from ‘control period’. Budget period is the
period for which a budget is prepared and used, which may then be sub-divided into
control periods. It refers to the period of time covered by a budget. In determining the
length of the budget period, the following factors should be considered :
(i) The budget period should be long enough to complete production of the various
products.
(ii) For the business of a seasonal nature, the budget period should cover at least
one entire seasonal cycle.
(iii) The budget period should be long enough to allow for the financing of production
well in advance of actual needs.
(iv) Major operations and drastic changes in plant lay-out or manufacturing methods
must be planned far in advance to determine financial requirements.
(v) The budget period should coincide with the financial accounting period to compare
actual results with budgeted estimates.
A budget period should be distinguished from ‘control period’. The latter indicates
the periodicity, with which reports are sent to the various levels of management. It need
not be the same as the budget period. Reports are sent usually at shorter intervals so
 41 EP – CACMA – December 2008
that corrective action may be taken within the budget period. This would ensure that the
overall variation between budget and actual is minimized. The periodicity of the reports
is also dependent upon the urgency and significance of the matter under report.
Answer 8(a)(ii)
Cash and cash equivalent
Cash comprises cash in hand and demand deposits with banks. 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. An investment
normally qualifies as a cash equivalent only when it has a short maturity of, say, three
months or less from the date of acquisition. Examples of cash equivalents are : (a)
treasury bills, (b) commercial paper, (c) money market funds, (d) investment in preference
shares and redeemable within three months can also be taken as cash equivalents if
there is no risk of failure of the company. Therefore, cash flows are inflows and outflows
of cash and cash equivalents.
Answer 8(a)(iii)
Cost sheet and production account
Following are the points of distinction between cost sheet and production account:

Cost Sheet Production Account

(1) It is prepared as a statement. It is prepared as an account.

(2) Expenses are classified to ascertain Expenses are not classified.
prime cost, factory cost, total cost, etc.
(3) To enable comparison, figures of No figures of previous period are
previous period are provided. provided. Hence no comparison is
possible.
(4) It is based on actual and estimated It is based on actual figures.
figures of expenses.
(5) It is prepared for each job and some- It is prepared for each production
times for the whole factory. department.

Answer 8(b)
Cash Flow Statement (Rs. In lakhs)
(A) Cash Flows from Operating Activities :
Net Profit before Provision for Taxation
Rs. (25,000 + 5,000) 30,000
Add : Adjustments
Depreciation 20,000
Loss on Sale of Assets 40
Interest Expenses 10,000 30,040
60,040
EP – CACMA – December 2008 42
Less : Amortisation of Capital Grant 6
Profit on Sale of Investments 100
Interest income on Investments 2,506 2,612
Operating Profit before change in Working Capital 57,428
Less : Increase in Working Capital 56,075
1,353
Less : Income Tax Paid 4,248
Net Cash used in Operating Activities (2,895)
It is prepared for each production
(B) Cash Flows from Investing Activities :
Sale on Investments (Book Value + Profit on Sale) 27,865
Sale of Asset (Book Value – Loss on Sale) 145
Interest on Investments 2,506
30,516
Less : Fixed Assets Purchased 14,560
Investments in Joint Venture 3,850
Expenses on construction W.I.P 34,740 53,150
Net Cash Used in Investing Activities (22,634)
(C) Cash Flow from Financing Activities :
Calls in Arrears received 2
Grant received for Capital Projects 12
Proceeds from Long Term Borrowings 25,980
Proceeds from Short Term Borrowings 20,575 46,569
Less : Interest Paid 10,520
Dividend Paid (Including Tax) 8,535 19,055
Net Cash Generated from Financing Activities 27,514
Net increase in Cash and Cash Equivalents (A+B+C) 1,985
Cash and Cash Equivalents at the beginning 5,003
Cash and Cash Equivalents at the end 6,988
 43 EP–TL– December 2008
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 2008-09 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 :
(i) Which of the following is not an example of capital receipt —
(a) Money received on issue of shares
(b) Money received on sale of land
(c) Money received on sale of goods
(d) None of the above.
(ii) Maximum qualifying limit for deduction under section 80C is —
(a) Rs.50,000
(b) Rs.1,00,000
(c) Rs.1,10,000
(d) Rs.1,50,000.
(iii) In certain cases, income of other person is included in the income of
assessee. It is called —
(a) Clubbing of income
(b) Increase in income
(c) Addition to income
(d) Set-off of income.
(iv) Remuneration for rendering services on a foreign ship is exempt in the case
of —
(a) A resident
(b) A non-resident who is not a citizen of India
(c) Not ordinarily resident
(d) A citizen of India.
(v) Which of the following is not an asset under section 2(ea) of the Wealth-tax
Act, 1957 —
(a) Motor car
(b) Boats and aircrafts

1
EP–TL– December 2008 44
(c) Guest house
(d) Cash at bank.
(vi) Any rent or revenue derived from land may be treated as agricultural income
if —
(a) It is derived from land
(b) The land is situated in India
(c) The land is used for agricultural purpose
(d) All the above conditions are satisfied.
(vii) Which of the following is covered under section 80D of the Income-tax Act,
1961 —
(a) Repayment of loan taken for higher education
(b) Medical treatment of handicapped dependent
(c) Medical insurance premium
(d) Reimbursement of medical expenses.
(viii) The incidence of taxation depends on the —
(a) Residential status of the assessee
(b) Accommodation of the assessee
(c) Citizenship of the assessee
(d) Marital status of the assessee. (1 mark each)
(b) Mrs. Vidya received the following amounts during the financial year 2007-08 :
Rs.
Gross salary 6,00,000
Family pension @ Rs.1,500 p.m. 18,000
Income of a minor child 6,000
Accumulated balance in provident fund of
her husband after his death 1,00,000
Gratuity received after the death of her husband 80,000
Calculate taxable income of Mrs. Vidya for the assessment year 2008-09.
(4 marks)
(c) What is meant by ‘pay-as-you-earn’ scheme ? (3 marks)
Answer 1(a)
(i) (c) Money received on sale of goods.
(ii) (b) 1,00,000
(iii) (a) Clubbing of income
(iv) (b) A non-resident who is not a citizen of India
(v) (d) Cash at bank
 45 EP–TL– December 2008
(vi) (d) All the above conditions are satisfied.
(vii) (c) Medical insurance premium
(viii) (a) Residential status of the assessee.
Answer 1(b)
Computation of Taxable Income of Mrs. Vidya for the Assessment Year 2008-09
Rs.
Gross Salary 6,00,000
Less : Standard deduction —
Income from Salary 6,00,000
Income from other sources :
Family Pension 18,000
Income from Minor Child under section 64 6,000
Less : Exemption under section 10(32) 1,500 4,500
Gross Total Income 6, 22,500
Less : Deduction under Section 57 in
respect of family pension(1/3rd of 18,000) 6,000
Taxable Income 6, 16,500
Note : Gratuity received by Mrs. Vidya on the death of her husband is not taxable
in her hands vide Circular No.573 dated August 21, 1990
Answer 1(c)
‘Pay-as-you-earn’ Scheme
Sections 207 to 219 of the Income-tax Act lay down the provisions relating to advance
payment of income-tax. The scheme of advance payment of tax is also known as ‘Pay
as you earn’. The income on which the assessee is required to pay advance tax is
commonly known as ‘income subject to advance tax’ and the tax payable on such
income is known as ‘advance tax’.
The liability to pay advance tax arises during any financial year, in accordance with
the provisions of Sections 208 to 219 (both inclusive), in respect of the total income of
the assessee which would be chargeable to tax for the assessment year immediately
following that financial year. Such income is, in Section 207, referred to as current
income.
As per Section 208, advance tax shall be payable during a financial year in every
case where the amount of such tax payable by the assessee during that year, as computed
in accordance with the provisions of this Chapter, is five thousand rupees or more.
Assessee is liable to Pay advance tax, if liability for tax exceeds Rs. 50,000.
EP–TL– December 2008 46
Question 2
(a) Re-write the following sentences after filling-up the blank spaces with appropriate
word(s)/figure(s) :
(i) Profit and gains arising from the transfer of a capital asset are taxable as
_____________.
(ii) Income accrued and received outside India is taxable in case of a
_______________.
(iii) If an asset is put to use for less than 180 days in the previous year, the
depreciation is charged at ___________ of normal rate.
(iv) Salary received by a Member of Parliament is taxable under the head
_____________.
(v) Unabsorbed part of the loss from house property can be carried forward and
set-off within the subsequent _____ years.
(vi) Remuneration earned by a member of HUF for the services rendered by him
is _________ income of the member.
(vii) One house or part of house belonging to an individual is __________ under
the Wealth-tax Act, 1957. (1 mark each)
(b) State, with reasons in brief, whether the following statements are correct or
incorrect:
(i) Sandeep, a trader, purchases standing crops and sells it after harvesting.
His income will be treated as agricultural income.
(ii) Suresh receives Rs.10 lakh from statutory provident fund on his retirement.
This amount is taxable under the head income from salary.
(iii) Sarita paid Rs.30,000 as interest @ 30% per annum on loan taken for the
construction of a house. No deduction shall be allowed for payment of
interest, as in the opinion of Assessing Officer, the rate of interest is very
high.
(iv) Ashok Exports Ltd. realised surplus of Rs.1,00,000 consequent to change
in exchange rate of currency. This surplus is a revenue receipt.
(2 marks each)
Answer 2(a)
(i) Capital gains
(ii) Resident and Ordinarily resident
(iii) 50 per cent or ½
(iv) Income from other sources.
(v) Eight
(vi) Exempt
(vii) Exempt.
 47 EP–TL– December 2008
Answer 2(b)(i)
Incorrect
Income accruing to Sandeep, a trader, by selling crops after harvesting is not
agricultural income, because he has no interest in land except a mere licence to enter
upon the land and gather upon the produce, since the land is not the direct, immediate or
effective source of income. [CIT v. Maddi Venkata Subbayya (1951) 20 ITR 151 Mad].
Answer 2(b)(ii)
Incorrect
Under Section 10(11) of the Income Tax Act any payment received from statutory
provident fund would be exempted from income tax without any monetary limit.
Answer 2(b)(iii)
Incorrect
Under Section 24(b) of the Income Tax Act the Assessing Officer is not empowered
to question an assessee about the rate of interest on loan. So the assertion of the
Assessing Officer is not tenable.
Answer 2(b)(iv)
Correct
If by virtue of exchange operations profits be made during the course of business
and in connection with business transactions, the excess receipt on account of conversion
of one currency into another would be revenue receipts; otherwise they would be capital
receipts.
Question 3
(a) Attempt the following :
(i) “Income-tax is a tax on income and not a tax on every item of money
received.” Explain this statement with reference to capital and revenue
receipts.
(ii) “Expenditure on scientific research is allowed as deduction even if
contribution is made to other institutions for scientific research.” Explain
the statement.
(iii) A person receives money from an insurer on account of damage to a
capital asset resulting from accidental fire. Whether such money shall be
taxable as capital gains ? Explain. (3 marks each)
(b) Distinguish between any two of the following :
(i) ‘House rent allowance’ and ‘rent free house’.
(ii) ‘Cost of acquisition’ and ‘cost of improvement’.
(iii) ‘Fair rent’ and ‘annual rent’. (3 marks each)
Answer 3(a)(i)
Income tax as the name implies, is a tax on income and not a tax on every item of
money received. Therefore, unless the receipt in question constitutes income as
EP–TL– December 2008 48
distinguished from capital, it cannot be charged to tax. For this purpose income should
be distinguished from capital which give rise to income. Receipts are of two types viz.,
capital receipts and revenue receipts. The distinction between the two is vital because
capital receipts are exempt from tax unless they are expressly taxable (for e.g., capital
gains’ are taxable under Section 45 even if they are capital receipts. On the other hand
revenue are taxable unless they are expressly exempt from tax. for example income
exempt under section 10. As the Income Tax Act does not define the term ‘capital
receipts’ and ‘revenue receipts’, one has to depend upon the meaning of the concepts
as well as the decided cases.
Answer 3(a)(ii)
According to Section 35(1) of the Income-tax Act, where the assessee does not
himself carry on scientific research but makes contribution to other institutions such
expenditure is allowed while computing income from business and profession. Accordingly
where the assessee does not himself carry on scientific research but makes contribution
to other institutions for this purpose, deduction is allowed if :
(i) The payment is made to an approved scientific research association which has
as its object undertaking of scientific research related or unrelated to the business
of assessee or to a university college or other institution to be used for scientific
research;
(ii) The amount of deduction shall be allowed to the extent of 125% of the sum paid
if the payment is made to an approved university college or institution.
(iii) The approval of the scientific research association, university, college or
institution is required to be obtained from Central Government as provided by
Finance Act, 1999.
Answer 3(a)(iii)
Section 45(1A) of Income Tax Act, provides that where any person receives at any
time during the previous year any money or other asset under an insurance from an
insurer on account of damage to, or destruction of, any capital asset, as a result of
flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or riot or
civil disturbance; or accidental fire or explosion; or by action by enemy or action by an
enemy or action taken in combating an enemy (whether with or without a declaration of
war), then, any profit or gain arising from receipt of such money or other asset shall be
chargeable to tax under the head capital gains. The income shall be deemed to be the
income for the previous year in which such money or other asset is received. For
computing capital gains the value of any money or the fair market value of asset received
on the date of receipt shall be deemed to be the full value of the consideration received
or accruing as a result of the transfer of damaged asset.
Answer 3(b)(i)
‘House rent allowance’ and ‘rent free house’

House Rent Allowance Rent Free House

1. It is dealt under Section 10(13A) and It is a kind of perquisite. It is dealt

Rule 2A. under section 17(2)(i) of the Act.
 49 EP–TL– December 2008

House Rent Allowance Rent Free House

2. While calculating ‘salary’ and basic Under calculation of ‘salary’, apart

pay, dearness allowance and from basic pay, DA and Commission;
commission (if terms of employment Bonus, fees and other taxable
provide) is included. allowances are also included.
3. Only taxable portion (after deduction) In this case, it included in the Gross
is added to the Gross Salary of the Salary of the assessee, as perquisite.
assessee.

Answer 3(b)(ii)
The distinction between ‘Cost of acquisition’ and ‘Cost of improvement’ can be
explained in following lines. The above two terms are associated with capital assets.
Cost of acquisition
Cost of acquisition of an asset is the value for which it was acquired by the assessee.
Expenses of capital nature for completing or acquiring the title to the property are includible
in the cost of acquisition. Cost of acquisition always precedes cost of improvement.
Cost of improvement
It is the capital expenditure incurred by the assessee in making any additions/
improvement to the capital asset. It also includes any expenditure incurred to protect or
complete the title to the capital assets or cure such title. Any expenditure incurred to
increase the value of the capital asset is treated as cost of improvement. Any cost of
improvement incurred before 1.4.1981 is not taken into consideration for calculating
capital gains chargeable to tax.
Answer 3(b)(iii)
‘Fair rent’ and ‘Annual rent’
Fair rent means the sum of for which the property might reasonably be expected to
let from year to year. This rent is also known as notional rent. It will be equal to the rent
which a similar property fetchs in the neighborhood.
Whereas annual rent means the actual rent. This happens only where the house
property has been actually let. Again annual rent means (i) if property is let out throughout
the previous year the annual rent received or receivable for that year and (ii) if the
property is let out for a part of the year the amount which bears the same proportion to
actual rent received or receivable for the period of letting as the period of twelve month
bears to the period of letting.
Quesiton 4
(a) Ram, who is 28 years of age, is a businessman in Delhi. On the basis of the
following profit and loss account for the financial year 2007-08, compute his
taxable income :
Rs. Rs.
Opening stock 20,700 Sales 15,00,000
Purchases 10,00,000 Closing stock 25,200
EP–TL– December 2008 50
Rs. Rs.
Household expenses 10,000
Income-tax for the
financial year 2007-08 30,000
Interest on capital 8,400
Depreciation on furniture 12,000
Reserve for bad debts 1,200
Salaries and wages 60,000
Rent and rates 25,000
Net profit 3,57,900
15,25,200 15,25,200

Other relevant particulars are as follows :

(i) Opening stock and closing stock have consistently been valued at 10%
below cost price.
(ii) Household expenses include a contribution of Rs.1,500 towards public
provident fund.
(iii) Amount of depreciation on furniture as per income-tax provisions is
Rs.10,000. (6 marks)
(b) Write short notes on any three of the following :
(i) The activities of a co-operative society which are eligible for deduction
under section 80P.
(ii) Essential conditions for claiming exemption under section 11 in the case of
a charitable trust.
(iii) Liability to pay fringe benefit tax.
(iv) Banking cash transaction tax. (3 marks each)
Answer 4(a)
Computation of Taxable Income of Mr. Ram for the Assessment Year 2008-09

Particulars Rs. Rs.

Income from business :

Net Profit as per Profit & Loss A/c 3,57,900
Add : Inadmissible Expenses :
Household Expenses 10,000
Income Tax 30,000
Interest on Capital 8,400
Excess depreciation (12,000 – 10,000) 2,000
 51 EP–TL– December 2008

Particulars Rs. Rs.

Reserve for Bad-debt 1,200 51,600

4,09,500
Add : Undervaluation of closing stock (1/9 x 25,200) 2,800
4,12,300
Less : Under Valuation of opening stock (1/9 x 20,700) 2,300
Income from business 4,10,000
Income from other sources ---
Gross Total Income 4,10,000
Less : Deduction u/s 80C (Contribution to PPF) 1,500
Taxable Income 4,08,500

Answer 4(b)(i)
The activities of a co-operative society which are eligible for deduction under
Section 80P are as follows:
(i) Income from banking business [Section 80P(2)(a)(i)]
(ii) Cottage Industry [Section 80P(2)(a)(ii)]
(iii) Marketing agricultural produce [Section 80P(2)(a)(iii)]
(iv) Purchase of agricultural implements [Section 80P(2)(a)(iv)]
(v) Processing of agricultural produce of its member [Section 80P(2)(a)(v)]
(vi) Collective disposal of Labour [Section 80P(2)(a)(vi)]
(vii) Primary Society engaged in supply of milk, oilseeds, fruits etc. [Section 80P(2)(b)]
(viii) Investment activities
(ix) Letting of Godowns [Section 80P(2)(e)]
Answer 4(b)(ii)
The essential conditions for availing exemption under Section 11 are :
(a) The property should be held under a trust or other legal obligation.
(b) The property should be held for charitable or religious purposes. Also the trust
should not be created for the benefit of any particular religious community; no
part of the income should vest for benefit of the settler or other specified person.
(c) The income of the trust should be applied to charitable or religious purposes or
is accumulated within the permitted limits for applying to such purposes.
(d) Income is applied to charitable or religious purposes in India.
(e) The trust should be registered with the Commissioner of Income Tax.
(f) If the income exceeds the exemption limit, the accounts of the trust should be
audited.
(g) The funds of the trust should be invested or deposited in any of the modes or
forms specified under Section 11(5).
EP–TL– December 2008 52
Answer 4(b)(iii)
Liability to pay fringe benefit tax
‘Fringe benefit tax’ (FBT) is payable by an ‘employer’ on the ‘fringe benefits’ provided
or deemed to have been provided by him to his employees. FBT means the tax
chargeable under Section 115WA. In addition to the income tax charged for every
assessment year commencing on or after 1.4.2006, additional income tax (in this Act
referred to as fringe benefit tax) in respect of fringe benefits provided or deemed to have
been provided by an employer to his employees during the previous year @ 30% (plus
applicable surcharge and education cess of 3% on the aggregate of additional income
tax and surcharge) on the value of such fringe benefits.
Even loss making them concerns will have to pay fringe benefit tax although there is
no income tax payable by him. An employer who is eligible for deductions under
Section 10A, 10AA, 10B, 10BA shall also be liable to pay FBT, even though he is
allowed deduction or exemption under the aforesaid sections.
Answer 4(b)(iv)
Banking Cash Transaction Tax (BCTT)
BCTT is a concept introduced by the Finance Act, 2005, under Chapter VII. According
to Section 94(3) of the Income Tax Act, BCTT means, the tax leviable on the taxable
banking transactions under the provisions of the Chapter. From 1.6.2005, every taxable
banking transaction be charged at 0.1%. The BCTT shall be payable as per provision of
section 94(8) of the Act and there is no surcharge and education cess on this tax. The
value of taxable banking transaction under Section 94(8)(9) is the amount of cash
withdrawn. The value of taxable banking transaction under section 94(8)(b) is the amount
of cash received on encashment of term deposit or deposits. The exemption limit for
bank withdrawal is Rs.50,000 for individual or HUF and Rs.1,00,000 for other persons in
respect of cash withdrawal on a day from a Bank.
Question 5
(a) Gulshan submits the following information relevant for the financial year
2007-08 :
Profit Loss
(Rs.) (Rs.)
Salary income 8,00,000 —
Income from house property :
House - A 25,000 —
House - B — 30,000
Profits and gains of business or profession :
Business - A 12,000 —
Business - B — 20,000
Business - C (Speculative) 22,000 —
Business - D (Speculative) — 35,000
Capital gains :
Short term capital gains 10,000 —
Short term capital loss — 30,000
 53 EP–TL– December 2008
Long-term capital gains on sale of building 16,000 —
Income form other sources :
Loss on maintenance of race horses — 15,000
Determine the net income of Gulshan for the assessment year 2008-09.
(7 marks)
(b) Suresh is the owner of a house. The actual rent of this house is Rs.9,000 per
month and municipal valuation of this house is Rs.7,500 per month. Other
informations about the house are —
(i) Municipal taxes are Rs.10,000 out of which the tenant has paid Rs.6,000.
(ii) Suresh has accepted a deposit of Rs.1,00,000 from the tenant on which
Suresh has paid interest @ 6% per annum.
(iii) The tenant is also liable for meeting the expenses on repairs of the house.
(iv) The tenant has paid Rs.25,000 as premium for the house. The premium is
non-refundable. The lease period of the house is 5 years.
Assuming that the house is built on free-hold land, determine the value of the
house under the provisions of the Wealth-tax Act, 1957 for the assessment
year 2008-09. (8 marks)
Answer 5(a)
Computation of Taxable Income of Mr. Gulshan for the Assessment Year 2008-09

Particulars Rs. Rs.

Inter-source adjustment :
(A) Income from Salary 8,00,000
(B) Income from House Property :
House A Rs. 25,000
House B Rs. 30,000 (Loss) (-) 5,000
(C) Profits and Gains of
Business or profession :
Business A Rs. 12,000
Business B Rs. 20,000 (Loss) (-) 8,000
Speculative Business :
Business C Rs. 22,000
Business D Rs. 35,000 (Loss) (-)13,000
(D) Capital Gains :
Short-term Capital Gains Rs. 10,000
Short-term Capital Loss (-) Rs. 30,000
(-) Rs. 20,000
Long-term Capital Gain Rs. 16,000 (-) 4,000
Income from other Sources:
Loss on maintenance of Race Horses (-)15,000
Net Income = Rs. 8,00,000 – Rs. 5,000 = Rs. 7,95,000
EP–TL– December 2008 54
Notes :
(i) The house property loss can be set-off against salary income.
(ii) Loss from business and profession cannot set-off against salary income
[Section 71(2A).
(iii) Loss from speculative business cannot be set-off in the assessment year
under any other head and it has to be carried forward to next assessment year
[Section 73].
(iv) Short-term capital loss will be carried forward to the next assessment year.
(v) As per section 74A, the loss incurred by the assessee, in the activity of owning
and maintaining race horses, shall only be set-off against the income of such
activity. It cannot be set-off against income from any other source.
Answer 5(b)
Computation of the Value of the house under the provisions of the Wealth Tax Act,
1957 for the Assessment Year 2008-09
Rs. Rs.
Actual rent paid by the tenant Rs. 9,000 x 12 1,08,000
Add :
(i) 1/9th of repair expenses are borne by the tenant i.e.,
1/9th x 1,08,000 12,000
(ii) Municipal Tax paid by tenant 6,000
(iii) Interest on deposit 15% of 1,00,000 = 15,000
Less : Interest paid 6,000 9,000
(iv) Annual premium 25,000/5 5,000
(iv) Annual Rent (a) 1,40,000
Municipal Value (b) 7,500 x 12 = Rs. 90,000
Gross Maintainable Rent (a) or (b) whichever is higher 1,40,000
Less : Municipal Taxes 10,000
15% of 1, 40,000 21,000 31,000
Net Maintainable Rent (NMR) 1,09,000
Capitalized Value of the house:
House is constructed on freehold
Land = NMR x 12.5
= 1,09,000 x 12.5 = Rs.13,62,500
 55 EP–TL– December 2008
Question 6
(a) Nikhil, Gagan and Suman are partners in a firm with equal shares. The profit
and loss account for the year ending 31st March, 2008 shows a net profit of
Rs.42,300 after debiting the following items :
(i) Salary of Rs. 24,000 each to Nikhil and Gagan.
(ii) Bonus to Suman Rs.18,000.
(iii) Commission of Rs. 9,000, Rs.10,000 and Rs. 15,000 to Nikhil, Gagan and
Suman respectively.
(iv) Interest on capital @ 15% amounting to Rs. 4,500, Rs. 6,000 and Rs.15,000
paid to Nikhil, Gagan and Suman respectively.
Assuming that all partners are working partners and the firm fulfils the conditions
of section 184, compute the total income of the firm and taxable income of the
partners in the firm. (8 marks)
(b) Indicate the amount of deduction available to an assessee from his gross total
income under section 80GG in respect of rent paid. Point out the circumstances
when the deduction will be denied. (7 marks)
Answer 6(a)
Computation of total Income of the Firm
Rs.
Net Profit as per Profit & Loss Account 42,300
Add : Disallowed items :
Salary to Partners : Nikhil 24,000
Gagan 24,000 48,000
Bonus to Suman 18,000
Commission to Partners : Nikhil 9,000
Gagan 10,000
Suman 15,000 34,000 1,00,000
Interest on Capital in Excess of 12% =
Nikhil = (4,500 x 3) ÷ 15 = 900
Gagan = (6,000 x 3) ÷ 15 = 1,200
Suman = (15,000 x 3) ÷ 15 = 3,000 5,100
Book Profit 1,47,400
Less : Remuneration under section 40(b)
Actual Remuneration 1,00,000
OR
90% of Book profit on
First 75,000 = 67,500
60% of Book profit on
Balance of Rs.72,400 = 43,440 1,10,940 1,00,000
Total Income of the Firm 47,400
EP–TL– December 2008 56
Computation of income of Partners from Firm
Nikhil Gagan Suman
Interest on Capital (12%) 3,600 4,800 12,000
Salary 24,000 24,000 ---
Bonus --- --- 18,000
Commission 9,000 10,000 15,000
36,600 38,800 45,000
Answer 6(b)
Deduction in respect of Rent Paid (Section 80 GG)
Deductions admissible under this Section is:
— Actual rent paid less 10% of ‘Adjusted Total Income’.
— 25% of such ‘Adjusted Total Income’.
— Amount calculated at Rs. 2,000 p.m.
whichever is least.
Adjusted Total Income is the adjusted Gross Total Income under Section 80G except
exempted income less long term capital gain.
However, certain conditions as given below are required to be fulfilled/satisfied for
claiming deduction u/s 80GG
— The assessee should not be receiving any house rent allowance exempt
u/s 10(13A) or rent free accommodation.
— The accommodation should be occupied by the assessee for the purpose of his
own residence.
— The assessee fulfills such other conditions or limitations as may be prescribed
having regard to the area or place in which such accommodation is situated and
other relevant consideration.
— The assessee or his spouse or his minor child or an HUF of which he is a
member does not own any accommodation at the place where he ordinarily
resides or performs duties of his office or employment or carries on his business
or profession.
— If the assessee owns any accommodation at any place other than that referred
to above, such accommodation should not be in the occupation of the assessee
and its annual value is not required to be determined under Section 23(2)(a)(i) or
Section 23(2)(b).
— Allowed only to an individual assessee after furnishing Form 10BA along with
return of income.
PART B
Question 7
Attempt any four of the following :
(a) What do you mean by ‘taxable services’ in the context of service tax ? How is
the value of taxable services determined ? (5 marks)
 57 EP–TL– December 2008
(b) Explain the procedure of registration for paying service tax. (5 marks)
(c) Under certain circumstances, the service receivers are liable to pay service
tax. Indicate such cases. (5 marks)
(d) Choose the most appropriate answer from the given options in respect of the
following :
(i) Tax on service is —
(a) a direct tax
(b) an indirect tax
(c) multipoint tax
(d) None of the above.
(ii) Appeal to Customs, Excise and Service Tax Appellate Tribunal can be filed
within —
(a) One month
(b) Two months
(c) Three months
(d) Four months.
(iii) Service tax is administered by the Department of —
(a) Central Sales Tax
(b) Central Excise
(c) Revenue
(d) Customs.
(iv) Service tax collected by mistake is required to be deposited under
section 73A of the Finance Act, 1994 to the —
(a) Central Government
(b) Account of the person who paid such tax
(c) National Defence Fund
(d) Chief Minister’s Relief Fund.
(v) Service tax is applicable in the case of —
(a) All Company Secretaries
(b) Company Secretaries in Practice
(c) Company Secretaries below the age of 65 years
(d) All services rendered by a Practising Company Secretary other than
representation services before any statutory authority. (1 mark each)
(e) Re-write the following sentences after filling-up the blank spaces with appropriate
word(s)/figure(s) :
(i) The Superintendent of Central Excise is bound to grant certificate of
registration for service tax within ________ days of the receipt of application.
EP–TL– December 2008 58
(ii) Taxable services provided to any person by the Reserve Bank of India is
____________ from service tax.
(iii) Under section 77 of the Finance Act, 1994, a maximum penalty of
Rs.________ is payable for late filing of service tax return.
(iv) The threshold limit for service tax exemption applicable in the case of small
service providers has been increased to _________.
(v) When there is no consideration received for services rendered freely, the
service tax ________ apply. (1 mark each)
(f) State, with reasons in brief, whether the following statements are correct or
incorrect:
(i) Service tax is to be paid to the credit of Central Government by the 5th of
the month immediately following the calendar month in which the payments
are received.
(ii) In case the taxable services are provided from more than one premises/
offices, the assessee can opt for registration of only one premises.
(iii) The facility for e-filing of returns is not applicable to service tax.
(iv) There is no system of getting advance ruling in respect of service tax matters.
(v) The CENVAT credit rules do not extend its scope to service tax paid in
respect of input services. (1 mark each)
Answer 7(a)
According to Section 67 of Chapter V of Finance Act, 1994, the value of any taxable
service shall be the ‘gross amount” charged by the service provider for such service
rendered by him. “Gross amount’ means the amount actually charged by the service
provider without making any deduction. The service provider will have to make a bill on
the receiver of service showing clearly the gross amount charged.
For determining the value of taxable service, the following factors regarding
identification of services have to take into consideration.
(a) Services to be included;
(b) Services to be excluded;
(c) Items which are statutorily includible or excludible;
(d) Items which are includible or excludible according to departmental clarifications;
(e) If permissible, reimbursement of out of pocket expenses have to be excluded;
(f) Inclusion of service tax element separately in the bills;
(g) General and specific exemptions services on which no service tax is leviable at
all are not required to be considered for determining the value of taxable service.
Such services are the services which are not covered under Section 65(105) of
the act and also those services which are provided in the State of Jammu &
Kashmir where a service provider is providing more than one taxable service,
the gross amount in respect of all the services should be determined separately
in respect of each such service so that specific exemptions applicable to each
service can be availed.
 59 EP–TL– December 2008
As per Section 67 of the act, if the consideration for a taxable service is in terms of
money, the value of such service shall be the gross amount charged by the service
provider for such service. If the consideration is not received in money, the value of
taxable service shall be the amount of money (together with service tax) equivalent to
the total consideration thus arrived at.
If the gross amount charged by service provider is inclusive of service tax payable,
the value of taxable service will be equal to = Gross amount charged x 100/100 + Rate
of Service Tax.
Gross amount charged includes payment by cheque, credit card deduction from
account and any form of payment by issue of credit or debit notes and book adjustments.
Answer 7(b)
Procedure of registration under service tax
Section 69 of the Finance act deals with the procedure of registration for paying
service tax. The procedure of registration is as follows :
(i) Every person responsible for collecting service tax has to register with Central
Excise authorities. He has to apply in Form ST-1.
(ii) The application for registration is to be made within a period of 30 days from the
date on which the service tax is liable.
(iii) ST-1 Form shall be accompanied with copy of PAN, an affidavit declaring the
commencement of services, proof of residence, photograph of the assessee
etc.
(iv) If the assessee is a partnership firm copy of certificate registration and
partnership deed must be attached to Form No.1.
(v) Where the assessee is providing more than one taxable service he can obtain
registration by making a single application mentioning all the taxable services
provided by him.
(vi) The Central Excise Officer shall after satisfying himself that the applications
form is in conformity with the prescribed guidelines shall grant a certificate of
registration in Form ST-2 within 7 days of the date of receipt of the application.
Answer 7(c)
Service receivers are liable to pay service tax
Though the service provider is primarily liable for payment of service tax, there is
one exception when the service receiver is liable for payment of service tax. As per
Section 68(2) read with Rule 2(d) of the Service Tax Rules, 1994, in case of non-resident
service provider who does not have any office in India, the service receiver is liable for
payment of service tax. Moreover, Finance Act, 2008 changed the recipient name from
‘client’ or ‘customer’ to ‘any person’. CBE&C TRU Letter F.No.34/1/TRU dated 29.2.2000
clarifies as follows. In number of taxable services, recipient of service is specified as
‘client’ or ‘customer’. Service tax is levied on services received in India. For example,
some musicians under a entity (established abroad) performs in India through a Indian
EP–TL– December 2008 60
entity. The musicians are of foreign nationality. The service receiver in India who are
conducting the show has to pay the service tax. Other examples are : insurance
companies paying service tax in respect of service provided by insurance agents. Service
provided by mutual fund distributor—service receiver to pay service tax on brokerage/
commission received.
Answer 7(d)
(i) (b) An indirect tax
(ii) (c) Three months
(iii) (b) Central Excise
(iv) (a) Central Government
(v) (d) All services rendered by a Practising Company Secretaries other than
representation services before any statutory authority.
Answer 7(e)
(i) 7 days
(ii) Exempt
(iii) Rs.1,000
(iv) Rs.10,00,000
(v) Will not
Answer 7(f)(i)
Correct
Rule 6 of the Service Tax Rules 1994 provided that any assessee who is providing
taxable services and receives payment for the services, shall pay service tax to the
credit of Central Government account by the 5th of that month immediately following the
month in which the payments are received.
Answer 7(f)(ii)
Correct
Section 69 of the Finance Act provides that in case the taxable services are provided
from more than one premises/offices the assessee can opt for registration for only one
premises if there is a system of centralized billing accounting with permission from
department.
Answer 7(f)(iii)
Incorrect
Service tax providers can avail the benefit of e-filing of returns through internet. The
assessee can go to the e-filing site ‘Home page’ by typing the address http://
servicetaxefiling.nic.in in the address bar of the browser. Assessees having a 15 digit
STP code and falling under certain categories can avail the facility of e-return.
 61 EP–TL– December 2008
Answer 7(f)(iv)
Incorrect
Chapter VA has been added to the Finance Act, 1994 by the Finance Act, 2003 to
provide for advance rulings in service tax on the lines of the similar provisions contained
in the Central Excise Act, 1944 and Customs Act, 1962.
Answer 7(f)(v)
Incorrect
Under CENVAT Credit Rules, 2004, now credit can be taken for inputs, capital
goods as well as for input services used in or in relation to manufacture or production of
final products or for providing of any taxable services.
PART C
Question 8
Attempt any four of the following :
(a) What are the different modes of computation of value added tax (VAT) and what
are the advantages of adoption of tax credit method ? (5 marks)
(b) “In the old sales tax structure, there were problems of double taxation of
commodities and multiplicity of taxes, resulting in a cascading burden.” In the
light of this statement, explain how VAT is an improvement over the old sales
tax structure. (5 marks)
(c) Dinesh purchases raw material from Ram and Shyam for manufacturing goods.
Dinesh sells goods to wholesaler Mohan. Mohan sells goods to Trilok, a retailer,
who sells goods to consumers. Calculate the amount of VAT collected by the
government from the following particulars based on the fact that Shyam charges
VAT @ 4% and other sellers charge VAT @ 12.5% :
Price without VAT
(Rs.)
Raw material supplied :
Ram to Dinesh 5,000
Shyam to Dinesh 8,000
Manufactured goods sold :
Dinesh to Mohan 18,000
Mohan to Trilok 25,000
Trilok to consumers 30,000
(5 marks)
(d) “Input tax credit is generally given for the entire VAT paid within the State on
purchases of taxable goods meant for resale or manufacture of taxable goods”.
In the light of this statement, enumerate the cases of purchases of goods in
respect of which tax credit is not available. (5 marks)
(e) Write a brief note on rates of VAT. (5 marks)
EP–TL– December 2008 62
(f) State, with reasons in brief, whether the following statements are correct or
incorrect:
(i) Zero rating transaction is the same as an exempt transaction.
(ii) VAT helps in checking tax evasion and in achieving neutrality.
(iii) The departmental audit also helps to check tax evasion.
(iv) Introduction of VAT has increased the professional development
opportunities for the Company Secretaries.
(v) As a result of introduction of VAT, the central sales tax will be phased out
in due course. (1 mark each)
Answer 8(a)
There are three different modes of computation of VAT :
(i) Addition Method : Under this method identification of value added is estimated
by adding values of all the elements of production wages, profits, rent and
interest. Under this method, the incidence of tax evasion is greater because it
does not require matching of invoices.
(ii) Subtraction Method : In this method value added is computed by subtracting
inputs from outputs. This is also known as the product approach.
(iii) Tax Credit Method : Under this method, Vat payable by a dealer is arrived at by
deducting tax on inputs from the tax on sales. This method is known as the
invoice method. This method is universally used because of the advantages of
computing tax liability under this method. As rate of tax is different in respect of
inputs and outputs, the addition method and the subtraction method are not
practicable in the case of a manufacturer.
The advantages of using tax credit method in estimating VAT liability are :
(i) Under this method exports are exempted from levy of domestic indirect taxes
as exports are taxed at Zero rate and refund of input taxes paid.
(ii) Under this method, dealers at intermediate stage are indifferent to tax rates
because burden of VAT is dependent upon rate of Tax at the final stage.
(iii) Under this method, cross-checking of tax paid at earlier stages is comparatively
easier because of the fact that dealers are required to specify the amount of tax
in their invoices.
Answer 8(b)
In the old sales tax structure, there were problems of double taxation of commodities
and multiplicity of taxes, resulting in a cascading burden”.
Earlier the local sales tax was based on single point tax. The single point tax was either
at first point or at last point. The First point tax (FPT) was convenient to the revenue but had
inbuilt cascading effect. The Last Point Tax (LPT) is an ideal system but it was evasion
prone resulting into loss of revenue to the government. The VAT system on the other hand
reduces the disadvantages of both FPT and LPT and at the same time draws the
advantages from resulting into both. The VAT system obviously is more transparent,
 63 EP–TL– December 2008
uniform and less prone to tax evasion. The following illustration may show the difference
between first point tax and last point tax.
Assume the base price of the commodity is Rs.1000 and the government wishes to
collect sales tax of 10% on base price i.e. Rs.100.
Taxation

F.P.T. Rs. L.P.T. Rs.

Price paid by A 1,000 Price paid by A 1,000

Tax paid by A 100 Tax paid by A Nil
Total 1,100 Total 1,000
Margin @50% added by A 550 Margin added by A @50% 500
Price paid by B 1,650 Price paid by B 1,500
Margin @50% added by B 825 Margin @50% added by B 750
2,475 2,250
Tax Nil Tax 100
Price paid by Consumer 2,475 Price paid by Consumer 2,350

In both the cases as above, the tax collected by the government is Rs.100 but
consumer would pay more under F.P.T. than under L.P.T. Under VAT, the consumer
would pay the same amount as under F.P.T. but the government would get the tax of
Rs.225/- instead of Rs.100/-
States continue to tax declared goods on single point basis under the existing system
subject to a rate of 4%. Under VAT, declared goods will also suffer tax at multiple
levels.
Under the existing Sales tax systems, inputs used for manufacture, whether capital
or otherwise, are eligible for concessional rate of tax on furnishing the requisite forms.
However, under the VAT system, there is no place for concessions. Goods will be taxed
at their respective rates, of course, with a provision for set off in future. There will be no
incentive schemes under VAT, barring those carried forward from the existing system.
Note : Students may give any other alternative example.
Answer 8(c)
Computation of Amount of VAT collected by the Government

Particualrs of Sales Price without Gross VAT Net VAT

VAT payable
by dealer
Rs. Rs. Rs.
Sales of Raw materials :
Ram to Dinesh Ltd. [VAT 12.5%] 5,000 625 625
Shyam to Dinesh Ltd. [VAT 4%] 8,000 320 320
EP–TL– December 2008 64

Particualrs of Sales Price without Gross VAT Net VAT

VAT payable
by dealer
Rs. Rs. Rs.

Sales of Goods :
Dinesh to Mohan [VAT 12.5%] 18,000 2,250
Less : VAT Credit to Dinesh Ltd.
[Rs.625+Rs.320) 945 1,305
Mohan to Trilok [VAT 12.5%] 25,000 3,125
Less VAT Credit to Mohan Ltd. 2,250 875
Trilok to Consumers [VAT 12.5%] 30,000 3,750
Less VAT Credit to Trilok 3,125 625
Total VAT collected by the Government 3,750

Answer 8(d)
Input tax credit means setting off the amount of input tax by a registered dealer
against the amount of his output tax liability. Input tax is the tax a dealer pays on his
local purchases of business inputs which include the goods he purchases for resale,
raw-materials, capital goods as well as other inputs for use in his business directly or
indirectly. Output tax is the tax that a dealer charges on his sales. Adjustment of input
tax from the amount of output tax is known as input tax credit.
The input tax credit is to be given for both manufacturers and traders for purchase of
inputs meant for both sales within the state as well as to other states.
The essence of VAT lies in providing set-off for the tax paid earlier through the
system of input tax credit. For example, suppose a dealer purchases raw material worth
Rs.5 lac and sells his output for Rs.8 lakhs. Input tax rate and output tax rate being
12.5%, input tax credit shall be computed as follows :
Input tax paid on raw material = Rs.62,500 [Rs.5 lakhs x 12.5%]
Output tax collected on sales = Rs.1.00,000 [Rs.8 lakhs x 12.5%]
VAT payable = (Rs.1,00,000 – Rs.62,500 = Rs.37,500
This shows that the assessee has availed input tax credit equal to Rs.62,500.
However, credit for payment of taxes on capital goods may not be immediately
available from output tax as it is available in respect of input tax on raw materials. Input
tax credit on capital goods may be granted over a certain period of time in order to soften
the burden on states due to high value of the capital goods. Also, input tax credit on
capital goods may not be available to a trader because he does not use the capital
goods for manufacture.
Purchases in respect of which no tax credit is available :
Input tax credit is generally given for the entire VAT paid within the state on purchases
 65 EP–TL– December 2008
of taxable goods meant for resale/manufacture. However, input tax credit is not available
in respect of the following purchases :
(i) Purchases of goods from unregistered dealers.
(ii) Purchases of goods from other states.
(iii) Goods purchased for manufacture of exempted goods.
(iv) Purchases of capital goods where credit is available in some cases in
instalments.
(v) Goods purchased for use as fuel in generation of power.
(vi) Goods purchased for being dispatched to outside states as branch transfers.
(vii) Goods purchased for use in manufacture of goods to be dispatched outside any
state as branch transfer.
(viii) Goods purchased where invoices do not show amounts of tax charged separately
by the dealer who sold goods.
(ix) Purchase of non-creditable goods.
(x) Purchases from a dealer who has opted for composition scheme.
Answer 8(e)
Rates of VAT : Under the VAT system five different rates are applicable as follows:
(i) Zero percent in the case of unprocessed agricultural goods and goods’ of social
implications. This rate is also applicable in case of items which are legally
barred from taxation.
(ii) One percent in the case gold and silver ornaments and other precious and semi-
previous metals.
(iii) Four per cent in the case of inputs used for manufacturing i.e., industrial goods,
declared goods; capital goods and other essential items;
(iv) Twelve and half per cent in the case of all the remaining goods other than luxury
goods.
(v) Twenty per cent in the case of luxury goods.
Answer 8(f)(i)
Incorrect
Reasons : Zero rating means that the tax payable on sale of a commodity is fixed at
0%. Though apparently, it looks similar to an exempt transaction, there is significance
difference between the two. While in an exempt transaction, the tax paid on inputs lapse
i.e., it cannot be set-off under the Zero rated sales, prior stage tax is set-off against the
0% tax paid and effectively the entire tax paid on purchases is eligible for refund.
Answer 8(f)(ii)
Correct
Reasons : A cross checking through computerized system shall be done on the
basis of coordination between tax authorities of the State Governments and the authorities
EP–TL– December 2008 66
of Central excise to compare constantly the tax returns and set-off documents of VAT
System of the States and those of Central Excise. This comprehensive cross checking
system helps in reduction in tax evasions and also leads to significant growth of tax
revenue
Answer 8(f)(iii)
Correct
Departmental Audit is conducted on the basis of sample checking in case of self
assessment cases. If some disparities are noted, then audit of those cases is done
thoroughly. It helps in checking tax evasions.
Answer 8(f)(iv)
Correct
With the inception of VAT, Company Secretaries are now able to act as authorized
representative of their clients in some states, through statutory provisions provided in
the respective VAT Acts.
Answer 8(f)(v)
Correct
With the introduction of VAT in majority of states in our country, Central Sales Tax
Act, 1956 will be phased out by 2010, it becomes imperative for our economy that the
VAT system should be implemented all over the country
 1 EP–CL–December 2008
EXECUTIVE PROGRAMME
DECEMBER 2008

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
Comment on any four of the following :
(i) Common seal of a company will have to be affixed on all the letters and
; documents of the company.
(ii) Private companies can commence business immediately after receipt of
‘certificate of incorporation’.
(iii) Bonus issue may be viewed as a ‘rights issue’ except that money is paid by the
company on behalf of the investing shareholders from its reserves.
(iv) A resolution was passed by the shareholders in an annual general meeting
approving final dividend @ 20% for the financial year 2007-08 and one month
later the Board of directors decided to pay further dividend @ 5% for the financial
year 2007-08.
(v) All the shareholders of a company are members and all the members of a
company are shareholders. (5 marks each)
Answer 1(i)
This statement is not correct. Common seal need not be affixed on the letters,
Annual Report etc. Resolution of Board is required for affixing common seal of the
company on deeds and contracts. Common seal is affixed only in presence of two
directors and company secretary or such other person as the Board may appoint for the
purpose in accordance with the articles of association. They will put their signatures on
the documents. The documents are:
— Power of Attorney of the company
— Share certificate, Debenture/Bond Certificate.
— Share warrant
— Any other deed as may be required by the articles.
The common seal will have to be kept under safe custody.
Answer 1(ii)
A private company can commence business immediately after its incorporation.
Certificate of commencement is not required for a private company.
EP–CL–December 2008 2
A private company or a company having no share capital may commence business
and exercise its various powers immediately after it is incorporated. Once it has received
its Certificate of Incorporation, nothing further is required.
Answer 1(iii)
Section 81 of the Companies Act, 1956 provides for issue of right shares to the
existing shareholders in proportion to the capital paid-up on their shares at the time of
issue. The shareholders may accept the offer or renounce it fully or partly. Price of
each share in rights issue, number of shares offered etc. is mentioned in the application
form. The application duly filled in along with cheque/Bank draft will have to be submitted,
as directed, on or before the last date.
Bonus shares are allotted by the company to the existing shareholders in proportion
to the number of shares they have been holding. The existing shareholders are neither
required to make any application nor have to pay anything. Accumulated profits of the
company transferred to reserve are converted into capital and the company divides the
capital amongst the existing shareholders in the form of bonus share.
Answer 1(iv)
It has been considered by the Company Law Board (CLB) that whether a company
is prohibited from declaring a further dividend at a general meeting of a company other
than the annual general meeting after a dividend had already been declared at an annual
general meeting. CLB is of the opinion that it is beyond the powers of a company to
declare a further dividend after the declaration of dividend at the annual general meeting.
In this connection attention is invited of all concerned, to the decision of the Calcutta
High Court in the matter of Biswa Nath Pd. Khaitan v. New Central Jute Mills Ltd.
[1961] 31 Comp. Cas. 125. Thus, a company which could not declare a dividend at an
annual general meeting may do so at a subsequent general meeting. On the other hand,
where a company has declared a dividend at a general meeting neither the company nor
its directors can declare a further dividend for the same year. (As per Circular No. 22 [7/
9/74-CL-II], dated 25-9-1975 issued by the Department of Company Affairs).
Answer 1(v)
Normally, all the shareholders are members and all the members are shareholders.
However, members are those whose names have been entered in the Register of Members
of the company. Hence, situation may arise when a shareholder may not be member
viz.:
(a) A person is holding a share warrant.
(b) A person has bought shares but his name is not been entered in the register of
members.
(c) Heir/legal representative of the deceased till the shares are transmitted in his/
her name.
Similarly, in certain situations a member may not be a shareholder, for instance-
(d) Person has transferred/sold shares but his name has been appearing in the
Register.
(e) Name of a person has been included in the Register by mistake.
 3 EP–CL–December 2008
Question 2
(a) Choose the most appropriate answer from the given options in respect of the
following :
(i) The number of debentureholders in a private company should not exceed—
(a) Fifty
(b) Twenty
(c) One hundred
(d) No such limit.
(ii) Which of the following is not an advantage/privilege enjoyed by a private
company over a public company —
(a) Business can be commenced immediately on incorporation
(b) No need to have more than two directors
(c) The number of members is limited to fifty
(d) There is no restriction on remuneration payable to directors.
(iii) In a government company, the government shareholding must not be less
than —
(a) 25% of the paid-up share capital
(b) 50% of the paid-up share capital
(c) 51% of the paid-up share capital
(d) 100% of the paid-up share capital.
(iv) Which of the following is not a characteristic of a statutory corporation in
India —
(a) It is owned by the State
(b) Its employees are civil servants and are governed by government
regulations in respect of conditions of service
(c) It is created by a special law of the Parliament or State legislature
(d) It is a body corporate and therefore it can sue and be sued.
(v) Under section 146, every registered company should have a registered
office —
(a) From the date on which it begins to carry on business
(b) From the date on which it obtains certificate of incorporation
(c) From the 30th day after the date of its incorporation
(d) From the date on which it begins to carry on business or from the
30th day after the date of its incorporation, whichever is earlier.
(vi) The quantum of registration fees payable by companies to be incorporated
in India depends on —
(a) The issued capital of the company
(b) The nominal capital of the company
EP–CL–December 2008 4
(c) The paid-up capital of the company
(d) The called-up capital of the company.
(vii) When bonus shares are allotted to members, they are required to pay —
(a) The market price of the shares
(b) The book value of the shares
(c) The face value of the shares
(d) None of the above.
(viii) Forfeited shares can be re-issued by a company by way of passing —
(a) An ordinary resolution at the general meeting
(b) A special resolution at the general meeting
(c) A Board resolution
(d) None of the above. (1 mark each)
(b) Re-write the following sentences after filling-up the blank spaces with appropriate
word(s)/figure(s) :
(i) _______ acts as the official signature of a company.
(ii) A private company, which is subsidiary of a company not being a private
company, is a __________ company.
(iii) _________ is an Act enacted to prevent the improper use of certain emblems
and names for professional and commercial purposes in India.
(iv) The issue of ESOPs or ESOS shall be subject to approval of shareholders
through a __________ resolution.
(v) When a company makes buy-back of shares or securities, the buy-back
operations shall be completed within ________ from the date of filing of
draft letter of offer.
(vi) Working capital of a company may be defined as the excess of current and
liquid assets over ___________.
(vii) The register and index of debentureholders of a company should be
preserved for _______ till after the redemption of the debentures.
(viii) The directors appointed under the principle of proportional representation
shall hold office for a period of _________. (1 mark each)
Answer 2(a)
(i) (d) No such limit
(ii) (c) The number of members is limited to fifty
(iii) (c) 51% of the paid-up share capital
(iv) (b) Its employees are civil servants and are governed by government regulations
in respect of conditions of service
 5 EP–CL–December 2008
(v) (d) From the date on which it begins to carry on business or from the 30th day
after the date of its incorporation, whichever is earlier
(vi) (b) The nominal capital of the company
(vii) (d) None of the above
(viii) (c) A Board resolution
Answer 2(b)
(i) Common seal acts as the official signature of a company.
(ii) A private company, which is subsidiary of a company not being a private company,
is a public company.
(iii) The Emblems and Names (Prevention of Improper Use) Act, 1950 is an Act
enacted to prevent the improper use of certain emblems and names for
professional and commercial purposes in India.
(iv) The issue of ESOPs or ESOS shall be subject to approval of shareholders
through a special resolution.
(v) When a company makes buy-back of shares or securities, the buy-back
operations shall be completed within 12 months from the date of filing of draft
letter of offer.
(vi) Working capital of a company may be defined as the excess of current and
liquid assets over current liabilities.
(vii) The register and index of debentureholders of a company should be preserved
for 15 years till after the redemption of the debentures.
(viii) The directors appointed under the principle of proportional representation shall
hold office for a period of three years.
Question 3
(a) What is ‘capital profit’ ? Can dividend be declared out of capital profit ? If so,
under what circumstances ? (6 marks)
(b) Under section 205, depreciation will have to be provided for working out
distributable profit. Though, the present value of land of a company, dealing
with land, is much less than the book value, the difference between the book
value and market value was not amortised before declaring dividend. Discuss.
(4 marks)
(c) Can the dividend be declared out of previous years’ profits transferred to reserve?
Discuss. (6 marks)
Answer 3(a)
The term ‘capital profits’ may be defined to mean those profits which arise otherwise
than in the normal course of the business and earned out of capital transactions. The
usual sources of capital profits are:
(1) Profits on sale of fixed assets.
(2) Profits on revaluation of fixed assets.
EP–CL–December 2008 6
(3) Premium on issue of shares/debentures/bonds.
(4) Profits on reissue of forfeited shares.
(5) Capital redemption reserve account.
(6) Profit prior to incorporation i.e. profits which accrues to a company till the date
of incorporation.
The Companies Act does not mention specifically whether capital profits i.e. profits
which arise where a company sells part of its fixed assets at a price higher than the
original cost of such asset, can be distributed as dividend.
However, in the two important cases of Lubbock v. British Bank of South America
(892) 2 Ch. 198 and Foster v. The New Trinidad Co. Ltd. (1901) 1 Ch. 208, the courts
have held that capital profits cannot be considered as available for distribution as dividend
unless:
(a) the articles of association authorise such a distribution; and
(b) the surplus is realised and remains after a valuation of the whole of the assets
and liabilities.
Answer 3(b)
A loss of capital need not be made good before declaring or payment of dividend out
of capital profits [Botton v. Natal Land & Colonisation Co.Ltd. (1892) 124 Ch.]
In this case, the plaintiff sought to restrain the payment of dividend by a company
dealing with land on the ground that the book value of the land was much higher than the
true value and must be written down before profit can be distributed. Held that a loss of
capital need not be made good before declaring a payment of dividend out of current
profits.
Answer 3(c)
In case of absence or inadequacy of profits, dividend can be declared under
Section 205A(3) of the Companies Act out of the accumulated profits earned by the
company in the previous years and transferred by it to reserves. Such declaration should
be in accordance with the rules prescribed in this regard by the Government. If such a
declaration does not conform to the rules, the declaration of dividend will require the
previous approval of the Central Government. In exercise of its powers under this sub-
section, the Central Government has framed rules known as Companies (Declaration of
Dividend Out of Reserves) Rules, 1975.
Under these rules dividend can be declared from amounts drawn from reserves (i.e.
free reserves only and not from any specific reserves) in case of absence or inadequacy
of profits subject to the following conditions:
(a) the rate of dividend declared shall not exceed the average of the rates of dividend
declared by it during the immediately preceding last five years or 10% of the
paid-up capital, whichever is less;
(b) the amount to be drawn shall not exceed 10% of its paid-up capital and free
reserves and the amount so drawn should be first utilised to set off the
 7 EP–CL–December 2008
losses incurred in the financial years before any dividend in respect of preference
and equity shares is declared; and
(c) the balance of reserves after such drawal shall not fall below 15% of the paid-up
share capital.
Question 4
(a) What are the provisions regarding disclosure in the directors’ report of the events
of great importance to the business developed after closure of accounts of the
company ? (4 marks)
(b) Enumerate the differences between ‘statutory books’ and ‘statistical books’ of a
company. (4 marks)
(c) What is the procedure regarding authentication of annual accounts of a private
company when only one director is available in India ? (4 marks)
(d) Is it mandatory for all the directors to obtain DIN ? Discuss. (4 marks)
Answer 4(a)
The annual report will have to include indication of company’s likely future
developments and of any important events occurring after balance sheet date.
Guidelines in this connection have been published by the Institute of Chartered
Accountants of India. According to the guidelines, significant events occurring after the
balance sheet date and the date on which the financial statements are approved, both
favourable and unfavourable, which have significant effects on the financial result may
require adjustment to asset and liabilities or may require disclosure. Those significant
events which occur during that period i.e. balance sheet date and their approval date,
which do not have material effect on the financial results as on balance sheet date may
be disclosed through Directors’ Report or Chairman’s statement/speech.
Two types of events have been identified –
(i) those that provide further evidence of conditions that existed at the balance
sheet date, and
(ii) those that are indicative of conditions that arose subsequent to the balance
sheet date.
Answer 4(b)
Statutory Books
In addition to the books of account, the Companies Act, 1956, specifically requires
certain other books to be kept by a company for maintaining a record of its different
activities in order to safeguard the interests of the shareholders and creditors. These
books are known as Statutory Books. Some of such books are laid down as below:
1. Register of investments in securities made by the company but not held by it in
its own name [Section 49(7)].
2. Register of fixed deposits.
3. Register of Securities bought back [Section 77A(9)].
EP–CL–December 2008 8
4. Register of charges [Section 143(1)].
5. Register of Members [Section 150(1)].
6. Index of Members where the number is more than fifty unless the Register of
Members itself affords an index [Section 151(1)].
7. Register of Debentureholders [Section 152(1)].
8. Index of Debentureholders where the number is more than fifty unless the Register
of Debentureholders itself affords an index [Section 152(2)].
9. Register and Index of Beneficial Owners [Section 152A].
10. Foreign Registers of Members and Debentures holders and their duplicates
[Sections 157(1) and 158(4)].
Statistical Books
In addition to the books of account and statutory books mentioned earlier, a company
usually maintains a number of statistical books in order to keep complete records of the
numerous details connected with the business operations. The keeping of such books
has become a necessity although there is no legal compulsion for the same. The following
is the list of some of such important books:
1. Share Application and Allotment Book
2. Share Call Book
3. Share Certificate Book
4. Share Transfer Book
5. Debenture Interest Book
6. Director’s Attendance Book
7. Agenda Book
8. Dividend Mandate Register
9. Share Warrants Register
10. Register of certified transfers
Answer 4(c)
According to section 215 of the Companies Act, 1956, the balance sheet and the
profit and loss account shall be signed on behalf of the Board by (a) the manager or
secretary if any and by (b) two directors one of whom shall be a managing director where
there is one. If there is no managing director, then by (a) the manager or secretary, if any
and (b) any two directors shall sign the same. If only one director or managing director
is, for the time being in India, he can sign the balance sheet and the profit and loss
account. However, in such a case he is required to file with the Registrar of Companies,
along with the balance sheet and the profit and loss account, a signed statement explaining
the reason as to why compliance with the provisions of Sub-section (1) of
Section 215 was not possible.
Answer 4(d)
Sections 266A to 266G of the Companies Act, 1956 contain the provisions for DIN.
As such, all the existing directors and individuals intending to become directors have to
 9 EP–CL–December 2008
obtain DIN within the prescribed time frame and in the manner as prescribed. Central
Govt. has prescribed Director Identification Number Rules, 2006, governing Director
Identification Number.
DIN is allotted by the Central Government within one month from the receipt of
application for allotment of DIN.
No one can obtain more than one DIN.
DIN number will have to be quoted while furnishing any return, information etc.
relate to the Director or contain information/reference of any director.
Intimation of DIN will have to be given to the Registrar or any other officer or other
specified authority within a week of obtaining the number.
Question 5
(a) State, with reasons in brief, whether the following statements are correct or
incorrect:
(i) The property of a company is not the property of the individual members.
(ii) The separate personality of a company is a statutory privilege and it must
be used for legitimate business purposes only.
(iii) Every company shall have the words ‘Limited’, if the company is registered
with a limited liability.
(iv) The members of an unlimited company are liable directly to the creditors of
the company. (2 marks each)
(b) Write short notes on the following :
(i) The golden rule or golden legacy; and
(ii) Corporation sole. (4 marks each)
Answer 5 (a)
(i) Correct. A company being a legal person and entirely distinct from its members,
is capable of owning, enjoying and disposing of property in its own name. The
company is the legal person in which all its property is vested, and by which it
is controlled, managed and disposed of. Their Lordships of the Madras High
Court in R.F. Perumal v. H. John Deavin, A.I.R. 1960 Mad. 43 held that “no
member can claim himself to be the owner of the company’s property during its
existence or in its winding-up”.
(ii) Correct. As separate personality of the company is a statutory privilege, it
must be used for legitimate business purposes only. Where a fraudulent and
dishonest use is made of the legal entity, the individuals concerned will not be
allowed to take shelter behind the corporate personality. The Court will
breakthrough the corporate shell and applies the principle of what is known as
“lifting of or piercing through the corporate veil”.
(iii) Correct. Every company shall have the words ‘Limited’, if the company is
registered with a limited liability. Moreover, if a company is registered with a
limited liability, the words ‘Private Limited’ must be added at the end of its name
EP–CL–December 2008 10
by a private limited company. On the other hand, the words ‘limited’ must be
added at the end of its name by a public limited company. However, section 25
company is an exception in this regard.
(iv) Incorrect. The members of an unlimited company are not liable directly to the
creditors of the company, as in the case of partners of a firm. The liability of the
members is only towards the company and in the event of its being wound up
only the Liquidator can ask the members to contribute to the assets of the
company which will be used in the discharge of the debts of the company.
Answer 5(b)(i)
The Golden Rule or Golden Legacy
It is the duty of those who issue the prospectus to be truthful in all respects. This
Golden Rule was enunciated by Kinderseley, V.C. in New Brunswick, etc., Co. v.
Muggeridge, (1860) 3 LT 651, and has come to be known as the “golden legacy”. “Those
who issue a prospectus hold out to the public great advantages which will accrue to the
persons who will take shares in the proposed undertaking. Public is invited to take
shares on the faith of the representation contained in the prospectus. The public is at
the mercy of company promoters. Everything must, therefore, be stated with strict and
scrupulous accuracy. Nothing should be stated as a fact which is not so and no fact
should be omitted, the existence of which might in any degree affect the nature or
quality of the privileges and advantages which the prospectus holds out as inducement
to take shares. In short, the true nature of the company’s venture should be ‘disclosed’.
If concealment of any material fact has prevented an adequate appreciation of what was
stated, it would amount to misrepresentation. Thus, even if every specific statement is
literally true, the prospectus may be false if by reason of the suppression of other
material facts, it conveys a false impression”.
Answer 5(b)(ii)
Corporation Sole
A corporation sole is a single individual constituted as a corporation in respect of
some office held by him or function performed by him. The Crown or a Bishop under the
English law is an example of this type of corporation. It may be noted that though a
corporation sole is excluded from the definition for the purposes of the Companies Act,
it continues to be a legal person capable of holding property and becoming a member of
a company.
The classic examples for ‘corporation sole’ in India are the President of India and
the Governors of the Indian States. Under Article 299 of the Constitution of India, all
contracts for and on behalf of the Governments in India are required to be in the name of
the President of India [in case of Government of India] and the Governors of the States
[in case of State Governments].
Question 6
(a) Jolly is one of the preference shareholders of Jack & Jill Ltd., a company registered
under the Companies Act, 1956. The annual general meeting of the said company
is scheduled to be held on 8th January, 2009. In this context, Jolly wants to
 11 EP–CL–December 2008
exercise his voting rights at the scheduled general meeting. Can he do so ? If
so, state whether he can vote on every resolution placed before the meeting.
(8 marks)
(b) What is ‘class meeting’ ? What are the purposes, provisions and procedure for
holding class meeting ? (8 marks)
Answer 6(a)
Under section 87(2) of Companies Act, 1956 a preference shareholder has the right
to vote only on a resolution which directly affects the rights attached to his preference
shares.
For this purpose, any resolution for winding up of the company or for the repayment
or reduction of its share capital shall be ‘deemed’ directly to affect the rights attached to
preference shares.
However, a preference shareholder shall be entitled to vote on every resolution
placed before the company at any meeting, if the dividend has remained unpaid for
specified period, viz.,
(i) in the case of cumulative preference shares, in respect of an aggregate period
of not less than two years preceding the date of the commencement of the
meeting; and
(ii) in the case of non-cumulative preference shares, either in respect of a period of
not less than two years ending with the expiry of the financial year immediately
preceding the commencement of the meeting or in respect of an aggregate
period of not less than three years, comprised in the six years ending with the
expiry of the financial year aforesaid.
Therefore, Jolly can exercise his voting rights at any general meeting only on matters
as discussed above.
Answer 6(b)
Class meetings are those meetings which are held by holders of a particular class of
shares, e. g. preference shares. Need for such meetings arise when it is proposed to
vary the rights of a particulars class of shares. Thus, for effecting such changes, it is
necessary that a separate meeting of the holders of that class of shares is held and the
proposed variation is approved at the meeting. For example, for deciding not to pay the
arrears of dividends on cumulative preference shares, for which it is necessary to call a
meeting of such shareholders and pass the resolution as prescribed by Section 106 of
the Act.
According to section 106 of the Companies Act, 1956, where the share capital of a
company is divided into different classes of shares, the rights attached to the shares of
any class may be varied with the consent in writing of the holders of not less than three-
fourths of the issued shares of that class or with the sanction of a special resolution
passed at a separate meeting of the holders of the issued shares of that class—
(a) if provision with respect to such variation is contained in the memorandum or
articles of the company, or
EP–CL–December 2008 12
(b) in the absence of any such provision in the memorandum or articles, if such
variation is not prohibited by the terms of issue of the shares of that class.

Procedure for Class Meetings

Regulation 3 of the Table A of Schedule I of the Act provides as under:

(1) If, at any time, the share capital is divided into different classes of shares, the
rights attached to any class (unless otherwise provided by the terms of issue of
the shares of that class) may, subject to the provisions of Sections 106 and
107, and whether or not the company is being wound up, be varied with the
consent in writing of the holders of three-fourths of the issued shares of that
class or with the sanction of special resolution passed at the separate meeting
of the holders of the shares of that class.

(2) To every such separate meeting, the provisions of these regulations relating to
general meeting shall mutatis-mutandis apply, but so that the necessary quorum
shall be two persons at least holding or representing by proxy one-third of the
issued shares of the class in question.

The articles of companies will have to be suitably modified or incorporated depending

on the needs of each case on the above lines.

The other procedures/provisions relating to service of notice, persons to whom notice

should be given, chairman, voting, proxy, minutes, poll etc. are similar to those provided
in case of general meetings.

Question 7

(a) Discuss the following :

(i) Front office represents the interface of the corporate and public users with
the MCA-21 system.
(ii) For MCA-21, four types of users which are identified as users of digital
signature.
(iii) SMART governance. (3 marks each)
(b) What relief are available to the minority shareholders against wrongful conduct
of the majority ? (7 marks)

Answer 7(a)(i)

Front office represents the interface of the corporate and public users with the MCA21
system. This comprises of Virtual Front Office and Registrar’s Front Office.

Virtual Front Office (VFO) – VFO merely represents a computer facility for filing of
digitally signed e-forms by accessing the MCA portal through internet.

Registrar’s Front Office (RFO) – When a company or user does not have the computer
facilities required for e-filing, it can avail of these facilities at the designated facilitation
centres, known as Registrar’s Front Office (RFO) or Physical Front Office (PFO).
 13 EP–CL–December 2008
Answer 7(a)(ii)
For MCA-21, the following four types of users are identified as users of Digital
Signatures and are required to obtain digital signature certificate:
1. MCA (Government) Employees.
2. Professionals (Company Secretaries, Chartered Accountants, Cost Accountants
and Lawyers) who interact with MCA and companies in the context of Companies
Act, 1956.
3. Authorized signatories of the company including Managing Director, Directors,
Manager or Secretary.
4. Representatives of Banks and Financial Institutions.
Answer 7(a)(iii)
SMART Governance
E-governance or Electronic governance is the application of information technology
to the Government functioning in order to bring about simple, moral, accountable,
responsive and transparent (SMART) Governance. The system aims at moving from
paper based to nearly paperless environment. It is based on the Government’s vision of
National e-governance in the country.
Answer 7(b)
The management of companies is based on majority rule. Board of Directors exercise
their powers vested on them by the Articles of Association of the company, Companies
Act and powers given to them by the shareholders in general meetings and passed by a
simple majority or by a Special Resolution, Majority rule prevails. However, the rule of
majority’s supremacy does not hold good in all situation.
The company law provides for adequate protection for the minority shareholders
when their rights are oppressed/abused by the majority. However, the Court will not
usually intervene at the instance of shareholders. The basic principles of non-interference
with the internal management of the company has been laid down in Foss vs. Harbottle.
The supremacy of the majority, does not prevail in all situations, as over a period of
time, certain exceptions have developed. For instance –
Under common law
— ultra vires acts.
— fraud on minority.
— wrong doers in control.
— breach of duties etc.
— resolution requiring special majority passed with simple majority.
— Individual membership rights invaded by the majority of shareholders.
Remedies under the Companies Act –
(i) variation of class rights
EP–CL–December 2008 14
(ii) in the scheme of reconstruction and amalgamation, the minority shareholders
are given protection
(iii) in cases of oppression and mismanagement, the provisions under section 397
and 398 come to the rescue of the minority shareholders
(iv) aggrieved shareholder can make winding up petition
(v) at the instance of shareholders Central Government can order for investigation.
Question 8
(a) What do you understand by the term ‘illegal association’ ? What are the rights
and liabilities of a member of illegal association ? (8 marks)
(b) An association of 15 members (not being HUF) started banking business without
being registered. After one year, six members retired. Thereafter, three members
instituted a suit for partition of assets of the association. Discuss the fate of
such a suit. (8 marks)
Answer 8(a)
Meaning of Illegal Association
By virtue of Section 11 of the Companies Act, no company, association or partnership
consisting of more than 20 persons (10 in the case of banking business) can be formed
for the purpose of carrying on any business for gain, unless it is registered as a company
under the Companies Act, or is formed in pursuance of some other Indian Law, or is a
Joint Hindu Family carrying on business for gain. If it is formed without complying with
the above provisions, it is called an illegal association.
Section 11 of the Act does not apply to the case of a single joint family carrying on
any business whatever may be the number of its members. But if two or more joint hindu
family firms carry on business together and the combined number of members exceed
20, then their association will become illegal. In computing the number, minor members
of joint families are to be ignored. If by reason of minor members of such joint families
on attaining majority, the number of persons exceeds the statutory limit, it will ipso facto
become an illegal association. In this case the question arises as to whether the penal
provision of this section may be applied to that illegal association. The liberal view under
such circumstances seems to be exemption from the penal provision since illegality
supervenes at a subsequent stage. [Niraban v. Lalit, I.L.R. (1938) 2 Cal. 368]. But by
strict interpretation of the provisions of the said section one may hold such illegal
association liable.
Rights and liabilities of a member of illegal association
The members of an illegal association are individually liable in respect of all acts or
contracts made on behalf of the association; they cannot either individually or collectively,
bring an action to enforce any contract so made, or to recover any debt due to the
association [Wilkinson v. Levison (1925) 42 T.L.R. 97].
Under Sub-sections (4) and (5) of Section 11, every member of an illegal association
is:
(i) personally liable for all liabilities incurred in carrying on the business of, or by,
the illegal association, and
 15 EP–CL–December 2008
(ii) punishable with fine up to Rs. 10,000.
Answer 8(b)
Under Section 11 of the Companies Act, an association consisting of more than 10
persons carrying on banking business (not being a Hindu Undivided family business)
should be registered. If it is not registered, it would be an illegal association, and the
effect would be that it has no legal existence. Law does not recognize such an
association. An illegal association cannot become a legal association even if later on
the number of members falls below the required numbers, e.g. 10 in this case.
It was held in the case of MST Kumarswami Chettiar v. MSM Chinnathambi Chettiar,
1950, that an association contravening section 11 of the Companies Act is an illegal
association and while it cannot sue on a contract made by it, its members will be
individually liable on such contract. There can be no cause of action on the basis of an
illegal association.
Thus, in the present question, the association will remain illegal notwithstanding the
fact that its number has fallen below 10. Therefore the suit will not be tenable.
EP-ELL – December 2008 16
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) Delayed payments to micro and macro enterprises
(ii) Star Export Houses
(iii) Salient features of the Special Economic Zones Act, 2005
(iv) Legal metrology
(v) Well-known trade mark
(vi) Competition policy
(vii) COB licence. (3 marks each)
Answer 1(i)
Delayed Payments to Micro and Macro Enterprises
Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006
provides that where any supplier, supplies any goods or renders any services to any
buyer, the buyer shall make payment therefor on or before the date agreed upon between
him and the supplier in writing or, where there is no agreement in this behalf, before the
appointed day. However, in no case the period agreed upon between the supplier and
the buyer in writing should exceed forty-five days from the day of acceptance or the day
of deemed acceptance.
Section 16 provides that in case the buyer fails to make payment of the amount to
the supplier, the buyer, notwithstanding anything contained in any agreement between
the buyer and the supplier or in any law for the time being in force, should pay compound
interest with monthly rests to the supplier on that amount from the appointed day or, as
the case may be, from the date immediately following the date agreed upon, at three
times of the bank rate notified by the Reserve Bank.
In the case of dispute regarding payment of any amount section 18 entitles any of
the parties to the dispute to make a reference to the Micro and Small Enterprises Facilitation
Council.
Answer to Question No. 1(ii)
Star Export Houses
The Foreign Trade Policy provides that Merchant as well as Manufacturer Exporters,
Service Providers, Export Oriented Units (EOUs) and Units located in Special Economic
Zones (SEZs), Agri Export Zone (AEZ’s), Electronic Hardware Technology Parks (EHTPs),
16
 17 EP-ELL – December 2008
Software Technology Parks (STPs) and Bio Technology Parks (BTPs) shall be eligible
for applying for status as Star Export Houses.
The Foreign Trade Policy categorizes the applicant depending on total FOB (FOR –
for deemed exports) export performance during the current plus the previous three years.
A Star Export House is eligible for the following facilities:
(i) Licence/certificate/permissions etc. and Customs clearances for both imports
and exports on self-declaration basis;
(ii) Fixation of Input-Output norms on priority within 60 days;
(iii) Exemption from compulsory negotiation of documents through banks except
the remittance, which is to be received through banking channels;
(iv) 100% retention of foreign exchange in EEFC account;
(v) 360 days normal repatriation period.
(vi) Exemption from furnishing of Bank Guarantee in Schemes under the Policy.
(vii) Two star export houses and above permitted export warehouses as per the
Guidelines specified by Department of Revenue.
Answer 1(iii)
Salient Features of the Special Economic Zone Act, 2005
The Salient Features of the Special Economic Zone Act are as under -
(i) matters relating to establishment of Special Economic Zone and for setting up
of units therein, including requirements, obligations and entitlements;
(ii) matters relating to requirements for setting up of off-shore banking units and
units in International Financial Service Center in Special Economic Zone,
including fiscal regime governing the operation of such units;
(iii) the fiscal regime for developers of Special Economic Zones and units set up
therein;
(iv) single window clearance mechanism at the Zone level;
(v) establishment of an Authority for each Special Economic Zone set up by the
Central Government to impart greater administrative autonomy; and
(vi) designation of special courts and single enforcement agency to ensure speedy
trial and investigation of notified offences committed in Special Economic Zones.
Answer 1(iv)
Legal Metrology
Legal Metrology is the name by which the law relating to weights and measures is
known in international parlance. Legal Metrology is very vital for scientific, technological
and industrial progress of any country. The establishment of national standards of weights
and measures and their proper enforcement, aim at ensuring accuracy of measurements
EP-ELL – December 2008 18
and measuring instruments and thus legal metrology strengthens the national economy
in a broader sense besides being a potential instrument of consumer protection.

The scope of legal metrology according to international practice extends to three

broad fields of human activities, namely, commercial transactions, industrial
measurements and measurements needed to ensure public health and human safety.
The coverage of legal metrology varies from country to country. In some, almost all
practical measurements are brought under the purview of legal metrology, whereas in
other countries legal metrology finds restricted application in a few quantities like mass,
length and volume used in trade and commerce. In most of the countries, however, legal
metrology encompasses measurements which have a bearing on the protection of
individuals from the financial and environmental points of view.

Legal metrology can be defined as that part of metrology which deals with units of
measurement, methods of measurement and measuring instruments in so far as they
concern statutory, technical and legal requirements which have the ultimate object of
assuring public guarantee from the point of view of security and of appropriate accuracy
of measurements.

Answer 1(v)

Well-Known Trade Mark

In terms of Section 2(1)(zg) of the Trademarks Act,1999, a well known trade mark in
relation to any goods or services means a mark which has become so to the substantial
segment of the public which uses such goods or services such that the use of such
mark in relation to other goods or services would be likely to be taken as indicating a
connection in the course of trade or rendering of services between those goods or services
and a person using the mark in relation to the first-mentioned goods or services.

Answer 1(vi)
Competition Policy
The basic purpose of Competition Policy is to preserve and promote competition as
a means of ensuring efficient allocation of resources in an economy. Competition policy
typically has two elements: one is a set of policies that enhance competition in local and
national markets. The second element is legislation designed to prevent anti-competitive
business practices with minimal Government intervention, i.e., a competition law.
Competition law by itself cannot produce or ensure competition in the market unless this
is facilitated by appropriate Government policies. On the other hand, Government policies
without a law to enforce such policies and prevent competition malpractices would also
be incomplete.
Competition policies cover a much broader set of instruments than competition law,
and typically include all policies aimed at increasing the intensity of competition or
rivalry in local and national markets by lowering entry barriers and opportunities for
harmful coordination, to ensure that markets work effectively and serve the interests of
all citizens. Competition law is only a subset of a nation's competition policies. Competition
policies typically include pro-competition approaches to trade, investment, sectoral
regulation, and consumer protection.
 19 EP-ELL – December 2008
Answer 1(vii)
Carry on Business (COB) Licence
A COB licence is required when a small scale unit exceeds the prescribed small
scale limit of investment in plant and machinery by way of natural growth and continues
to manufacture small scale reserved items(s). Also, if exemption from Industrial licensing
granted for any item is withdrawn, the industrial undertakings manufacturing such item(s)
require COB licence.
The application for COB licence should be submitted in prescribed form to the SIA,
Department of industrial Policy and Promotion, along with a crossed demand draft of
prescribed amount drawn in favour of the Pay & Accounts Officers, Department of
industrial Development, Ministry of Industry, payable at the State Bank of India, Nirman
Bhawan, New Delhi.
Question 2
State, giving reasons in brief, whether the following statements are true or false.
Attempt any five :
(i) The Competition Act, 2002 prohibits dominance as well as the abuse of dominant
position.
(ii) In all legal proceedings relating to trade marks, registered under the Trade Marks
Act, 1999, the original registration and all subsequent assignments and
transmissions thereof shall be conclusive proof of its validity.
(iii) Money laundering is a national phenomenon and stern measures are of critical
importance at the national level.
(iv) The Public Liability Insurance Act, 1991 was enacted for the purpose of providing
immediate relief to the workers affected by accidents occurring while handling
the hazardous substances.
(v) Duty Free Replenishment Certificate (DFRC) is issued to a merchant exporter
or manufacturer exporter for the imports used in the manufacture of goods without
payment of any basic customs duty whatsoever.
(vi) The erroneous description of manufacturing company in an advertisement
amounts to misleading representation and hence an unfair trade practice.
(3 marks each)
Answer 2(i)
False
Reasons
The Competition Act, 2002 expressly prohibits any enterprise or group from abusing
its dominant position, i. e. , a position of strength, enjoyed by an enterprise or group, in
the relevant market, in India, which enables it to–
(i) operate independently of competitive forces prevailing in the relevant market; or
(ii) affect its competitors or consumers or the relevant market in its favour”.
EP-ELL – December 2008 20
Section 4(2)(a) states that there shall be abuse of dominance position, if an enterprise
or group-directly or indirectly imposes unfair or discriminatory;
(i) condition in purchase or sale of goods or services; or
(ii) price in purchase or sale (including predatory price) of goods or service.
In terms of section 4(2)(b) abuse of dominant position by an enterprise or group
include limiting or restricting
(i) production of goods or provision of services or market therefor; or
(ii) technical or scientific development relating to goods or services to the prejudice
of consumers.
Similarly Section 4 (2) (c), (d) and (e) specify three other forms of abuses namely, if
any person indulges in practice or practices resulting in denial of market access in any
manner; or makes conclusion of contracts subject to acceptance by other parties of
supplementary obligations which, by their nature or according to commercial usage,
have no connection with the subject of such contracts and also, if any person uses
dominant position in one relevant market to enter into, or protect, other relevant market.
Answer 2(ii)
True
Reasons
Section 31 of the Trademarks Act, 1999 stipulates that in all legal proceedings
relating to trade mark registered under the Act, the original registration and all subsequent
assignments and transmission thereof shall be prima facie evidence of its validity.
However, as per Section 34 the proprietor or a registered user of a registered trademark
is not entitled to interfere with or restrain the use by any person of a trademark identical
with or nearly resembling it in relation to goods or services in relation to which that
person or a predecessor in his title has continuously used that trade mark from a prior
date.
Answer 2(iii)
False

Reasons

Money laundering is an international phenomenon and therefore transnational co-

operation is of critical importance in the fight against this menace. A number of initiatives
have been taken to deal with the problem at international level. In this context, the
United Nations or the Bank for International Settlements, took some initiatives in 1980s
to address the problem of money laundering. However, with the creation of the Financial
Action Task Force (FATF) in 1989, regional groupings, such as the European Union,
Council of Europe, and organisation of American States also established anti- money
laundering standards for their member countries.
The major international agreements addressing money laundering include the United
Nations Convention against Illicit Trafficking in Drugs and Psychotropic Substances
 21 EP-ELL – December 2008
(the Vienna Convention) and Council of Europe Convention on Laundering, Search, Seizure
and Confiscation of the Proceeds of Crime. The role of financial institutions in preventing
and detecting money laundering has also been the subject of pronouncements by the
Basle Committee on Banking Regulation Supervisory Practices, the European Union
and the International Organization of Securities Commissions.
Answer 2(iv)
False
Reasons
The Public Liability Insurance Act, 1991, was enacted for the purpose of providing
immediate relief to the persons affected by accidents occurring while handling any
hazardous substance and for other incidental and connected matters.
The growth of hazardous industries, processes and operations in India has been
accompanied by growing risks of accidents, not only to the workmen of such undertakings,
but also members of the public in the vicinity. Whereas the workers are generally protected
under the Workmen’s Compensation Act and the Employees State Insurance Act,
members of the public who may be victims are not assured of any relief except through
long-drawn legal processes. Considering that majority of the affected people belong to
weaker sections of the society, and very limited resources available with them to go
through legal proceedings, this Act provides for Mandatory Public Liability Insurance to
be taken by companies for installations handling any hazardous substance notified under
the Environment Protection Act.
Answer 2(v)
True
Reasons

Duty Free Replenishment Certificate 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. DFRC is issued on minimum value addition of 25% except for
items in gems and jewellery sector for which prescribed value addition is applicable.

In fact, DFRC is issued only in respect of products covered under the Standard
Input Output Norms 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. DFRC and/or the material(s) imported
against it are freely transferable. However, DFRC with actual user condition or the
material(s) imported against it is non-transferable.
Answer 2(vi)
False
Reasons
The question as to what amounts to misleading advertisement was considered by
the Supreme Court (in the first case decided by it relating to unfair trade practice) in
EP-ELL – December 2008 22
Lakhanpal National Ltd. v. MRTP Commission and Another (1989) 2 Comp. L.J. 159
(SC). The precise question was whether erroneous description of manufacturing company
in an advertisement amounted to misleading representation under Section 36A(1).
Explaining the meaning of the term ‘unfair trade practice’ the Supreme Court observed
that the definition of this term in Section 36A is not inclusive or flexible but specific and
limited in its contents. The object is to bring honesty and truth in the relationship between
the manufacturer and the consumer. When a problem arose as to whether a particular
act could be condemned as an unfair trade practice or not, the key to the solution is to
examine whether it contains a false statement and is misleading and further what is the
effect of such representation made by the manufacturer on the common man.
The Supreme Court pointed out that Mitsushita Ltd., is not a popular name in India
while its product ‘National’ and ‘Panasonic’ is indeed popular. An advertisement mentioning
merely Mitsushita Ltd. would, therefore, fail to convey anything to an ordinary buyer
unless he is also told that it is the same company which manufactured products
known to him by the names National and Panasonic. Therefore, the erroneous
description of the manufacturing company in the advertisements do not attract the
provisions of Section 36A of the MRTP Act. The Supreme Court, however, pointed out
that it would be more proper for the company to give the full facts by referring to Mitsushita
Ltd., by its correct name and further stating that its products is known by the name
National and Panasonic.
Question 3
(a) Distinguish between any two of the following :
(i) 'Relevant geographic market' and 'relevant product market'.
(ii) 'Small scale industrial undertaking ' and 'ancillary industrial undertaking',
(iii) 'Current account transactions' and 'capital account transactions'.
(5 marks each)
(b) Re-write the following sentences after filling-up the blank spaces with appropriate
word(s)/figure(s) :
(i) Release of foreign exchange facilities for emigration exceeding US$ _______
or amount prescribed by the country of emigration requires prior approval of
RBI.
(ii) No permission from the Central Government is required to receive foreign
contribution from a relative not exceeding value of Rs. __________ per year
subject to its intimation to the Central Government.
(iii) An Indian citizen resident outside India may acquire any immovable property
in India other than _____________.
(iv) Remittance of foreign exchange exceeding US$ ____________ per project
for any consultancy services procured from abroad requires prior approval
of RBI.
(v) The minimum time for applying for technological upgradation of the existing
capital goods imported under the Export Promotion Capital Goods (EPCG)
Scheme is ____________ from the date of issuance of the authorisation.
(1 mark each)
 23 EP-ELL – December 2008
Answer 3(a)(i)
Relevant Geographic Market
As per Section 2(s) of the Competition Act, 2002 Relevant Geographic Market means
a market comprising the area in which the conditions of competition for supply of goods
or provision of services or demand of goods or services are distinctly homogenous and
can be distinguished from conditions prevailing in neighbouring areas.
Relevant Product Market
As per Section 2(t) of the Competition Act, 2002 Relevant Product Market means a
market comprising of all those products or services which are regarded as interchangeable
or substitutable by the consumer, by reasons of characteristics of products or services,
their prices and intended use.
The terms ‘relevant market’, ‘relevant geographical market’ and ‘relevant product
market’ have relevance in determination of the agreements being anti competitive, in
evaluating combinations and dominance of an enterprise or group.
Answer 3(a)(ii)
Small Scale Industrial Undertaking
An industrial undertaking in which the investment in fixed assets in plant and
machinery, whether held on ownership terms or on lease or on hire purchase, does not
exceed rupees one crore.
Ancillary Industrial Undertaking
An industrial undertaking which is engaged or is proposed to be engaged in the
manufacturing or production of parts, components, sub-assemblies, tooling or
intermediates, or the rendering of services, and undertaking supplies or proposes to
supply or renders not more than fifty per cent of its production or services, as the case
may be, to one or more other industrial undertakings and whose investment in fixed
assets in plant and machinery, whether held on ownership terms or on lease or on hire
purchase, does not exceed rupees one crore.
No small scale or ancillary industrial undertaking can be subsidiary of, or owned or
controlled by any other industrial undertaking. According to Section 11B of Industries
(Development and Regulation) Act, 1951, the Central Government has been empowered
to specify by notification the requirements which shall be complied with by an industrial
undertaking to enable it to be regarded as an ancillary or a small scale industrial
undertaking.
Answer 3(a)(iii)
Capital Account Transaction
‘Capital account transaction’ has been defined under Section 2(e) of the Foreign
Exchange Management Act, 1999 to mean any transaction which alters the assets or
liabilities including contingent liabilities, outside India of persons resident in India or
assets or liabilities in India of person resident outside India and includes the transactions
specified in Sub-section (3) of Section 6 of the Act.
EP-ELL – December 2008 24
Section 6 of the Foreign Exchange Management Act, 1999 allows capital account
transactions subject however to certain conditions. Reserve Bank of India has been
empowered to specify, in consultation with the Central Government, any class or classes
of capital account transactions permissible and the limit upto which foreign exchange
shall be admissible for such transactions.
Current Account Transaction
The term current account transaction has been defined under Section 2(j) of the
Foreign Exchange Management Act, 1999 to mean a transaction other than a capital
account transaction and includes payments due in connection with foreign trade, other
current business, services and short term banking and credit facilities in the ordinary
course of business; payments due as interest on loan and as net income from
investments; remittances for living expenses of parents, spouse and children residing
abroad and expenses in connection with foreign travel, education and medical care of
parents, spouse and children.

Under the Foreign Exchange Management Act freedom has been granted for selling
and drawing of foreign exchange to or from an authorized person for undertaking current
account transactions. However, the Central Government has been vested with powers
in consultation with Reserve Bank to impose reasonable restrictions on current account
transactions. The Central Government has framed Foreign Exchange Management
(Current Account Transactions) Rules, 2000 dealing with various aspects of current
account transactions.

Section 5 of the Act allows any person to sell or draw foreign exchange to or from an
authorised person if such sale or drawal is a current account transaction as defined
under Section 2(j) of the Act. However, the Central Government may, in the public
interest and in consultation with the Reserve Bank impose reasonable restrictions for
current account transactions.

Answer 3(b)

(i) 5000

(ii) 8000

(iii) Agricultural/plantation/farm house.

(iv) one million
(v) 5 years.
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) Indotech Ltd. desires to make payments of commission on exports made
towards equity investment in its joint venture company abroad.
(ii) Rupa intends to take an insurance policy in her name from an insurance
company abroad involving payment of premium amounting to US$20,000.
 25 EP-ELL – December 2008
(iii) A non-resident shareholder has applied for the issue of additional shares
over and above his entitlement of rights shares in an Indian company.
(iv) Girish intends to transfer his shareholding in rupee equivalent to US$20,000
as gift to his son who is a resident outside India.
(v) Microtech Ltd., a software exporter company, desires to receive 25% of the
value of its exports in the form of shares in an overseas software company
without entering into joint venture agreement.
(b) Mention the provisions of the Foreign Contribution (Regulation) Act, 1976 in
respect of exemptions from accepting foreign contributions. (5 marks)
(c) Explain the provisions of the Trade Marks Act, 1999 regarding infringement of
registered trade marks. (5 marks)
Answer 4(a)(i)
As per Rule 3 read with Schedule I of Foreign Exchange Management (Current
Account Transaction) Rules, 2000 making payments of commission on export made
towards equity investment in its joint venture company abroad is prohibited.
Hence in view of the aforesaid legal provision, Indotech Ltd. can not make payments
of commission on export made towards equity investment in its joint venture company
abroad.
Answer 4(a)(ii)
Schedule I of the Foreign Exchange Management (Capital Account Transaction)
Regulation 2000 allowes a person resident in India for taking out of insurance policy
from an insurance company outside India.
Hence in view of the aforesaid legal provision, Rupa can take insurance policy in
her name from an insurance company abroad involving payment of premium exceeding
US$ 20,000.
Answer 4(a)(iii)
FEMA allows Indian companies to freely issue rights shares to existing non-resident
shareholders, subject to adherence to sectoral cap, if any. However, such issue of
rights shares have to be in accordance with other laws/statutes like the Companies Act,
1956, SEBI (Disclosure and Investor Protection) Guidelines (in case of listed companies)
etc.
The price of shares offered on rights basis by the Indian company to non-resident
shareholders should not be lower than the price at which such shares are offered to
resident shareholders.
Hence in view of the aforesaid legal provision, a non – resident shareholder could
apply for the additional shares over and above his entitlement of right shares of Indian
company.
Answer 4(a)(iv)
Girish required prior approval of Reserve Bank of India for transferring his shareholding
EP-ELL – December 2008 26
in rupee equivalent to US$ 20, 000 as gift to his son who is a resident outside India.
Provided that -
— The gift does not exceed 5 per cent of the paid-up capital of the Indian company.
— The applicable sectoral cap limit in the Indian company is not breached.
— The transferor (donor) and the transferee (donee) are close relatives as defined
in Section 6 of the Companies Act, 1956, as amended from time to time.
— The value of security to be transferred together with any security already
transferred by the transferor, as gift, to any person residing outside India does
not exceed the rupee equivalent of USD 25,000 during a calendar year.
— Such other conditions as stipulated by Reserve Bank in public interest from
time to time.
Answer 4(a)(v)
Foreign Exchange Management Act allows Indian software exporters to receive 25
per cent of the value of their exports to an overseas software startup company in the
form of shares without entering into Joint Venture Agreements, with prior approval of the
Reserve Bank of India.
Hence in view of the aforesaid legal position, Microtech Ltd. can receive shares in
an overseas software company without entering into joint venture agreements, with prior
approval of the Reserve Bank of India.
Answer 4(b)
Section 8 of the Foreign Contributions (Regulation) Act, 1976 contains exemptions
to the prohibition on the acceptance of foreign contribution by any person specified in
Section 4. Accordingly, Section 8 allows the acceptance of foreign contribution by the
persons, subject however to Section 10 of the Act and where such contribution is accepted
by him
(a) by way of salary, wages or other remuneration due to him or to any group of
persons working under him, from any foreign source or by way of payment in the
ordinary course of business transacted in India by such foreign source; or
(b) by way of payment, in the course of international trade or commerce, or in the
ordinary course of business transacted by him outside India; or
(c) as an agent of a foreign source in relation to any transaction made by such
foreign source with Government; or
(d) by way of a gift or presentation made to him as a member of any Indian
delegation, provided that such gift or present was accepted in accordance with
the regulations made by the Central Government with regard to the acceptance
or retention of such gift or presentation; or
(e) from his relative when such foreign contribution has been received with the
previous permission of the Central Government. However no such permission
is required if the amount of foreign contribution received by him from his relative
does not exceed in value, eight thousand rupees per annum and an intimation is
given by him to the Central Government as to the amount received, the source
 27 EP-ELL – December 2008
from which and the manner in which it was received and the purpose for which
and the manner in which it was utilised by him;
(f) by way of remittance received, in the ordinary course of business, through any
official channel, post office, or any authorised dealer in foreign exchange under
the Foreign Exchange Regulation Act, 1973 (46 of 1973).
Answer 4(c)
Section 29 of the Trademarks Act, 1999 dealing with infringement of trade marks,
explicitly enumerates the grounds which constitute infringement of a trademark. This
section lays down that when a registered trade mark is used by a person who is not
entitled to use such a trade mark under the law, it constitutes infringement. This section
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. Additionally in respect of
cases falling in category (c) above, there will be a legal presumption of likelihood of
confusion on the part of the public.

A person has been prohibited from adopting someone elses trade mark, as his
trade name or name of his business concern or part of the name of his business concern
dealing with goods or services in respect of which trade mark is registered.

A person shall be deemed to have used a registered trade mark in circumstances

which include affixing the mark to goods or packaging, offering or exposing the goods
for sale or supply of services, importing or exporting the goods, the use of the mark as
trade name or trade mark on business paper or in advertising. A person shall be deemed
to have infringed a trade mark if he applies such registered trade mark knowing that
application of such mark is not authorised by the proprietor or licensee. Advertising of a
trade mark to take unfair advantage of, or against the reputation of the trade mark also
constitutes an infringement under Section 29(8) of the Act. Where the distinctive element
of a registered trade mark consists of words, the spoken use of such words as well as
visual representation for promoting the sale of goods or promotion of service would
constitute infringement under section29 (9) of the Act.
Question 5
(a) Mention any five inventions which are not patentable under the Patents Act,
1970. (5 marks)
(b) State the provisions of the Environment (Protection) Act, 1986 relating to the
offences by companies. (5 marks)
(c) Sangeetha filed a complaint against a bank where her ornaments kept in the
EP-ELL – December 2008 28
bank's locker were found missing and sought compensation through the
Consumers Disputes Redressal Forum against the deficiency in service by the
bank. The bank submitted a certificate recorded by the custodian of the bank on
the day Sangeetha had operated the locker which stated that all lockers operated
during the day had been checked and found properly locked. Will Sangeetha
succeed in her claim ? (5 marks)
Answer 5(a)
The following are not inventions within the meaning of Section 3 of the Patent Act,
1970:
(a) an invention which is frivolous or which claims anything obviously contrary to
well established natural laws;
(b) an invention the primary or intended use or commercial exploitation of which
could be contrary to public order or morality or which causes serious prejudice
to human, animal or plant life or health or to the environment;
(c) the mere discovery of a scientific principle or the formulation of an abstract
theory or discovery of any living thing or non-living substances occurring in
nature;
(d) the mere discovery of a new form of a known substance which does not result
in the enhancement of the known efficacy of that substance or the mere discovery
of any property or mere new use for a known substance or of the mere use of a
known process, machine or apparatus unless such known process results in a
new product or employs at least one new reactant.
Explanation to this clause clarifies that salts, esters, polymorphs, metabolites,
pure form, particle size, isomers, mixtures of isomers, complexes, combinations
and other derivatives of known substance shall be considered to be the same
substance, unless they differ significantly in properties with regard to efficacy.
(e) a substance obtained by a mere admixture resulting only in the aggregation of
the properties of the components thereof or a process for producing such
substance.
(f) the mere arrangement or re-arrangement or duplication of known devices each
functioning independently of one another in a known way;
(g) a method of agriculture or horticulture;
(h) any process for the medicinal, surgical, curative, prophylactic diagnostic,
therapeutic or other treatment of human beings or any process for a similar
treatment of animals to render them free of disease or to increase their economic
value or that of their products;
(i) plants and animals in whole or any part thereof other than micro-organisms but
including seeds, varieties and species and essentially biological processes for
production or propagation of plants and animals;
(j) a computer programme per se other than its technical application to industry or
a combination with hardware;
(k) a literary, dramatic, musical or artistic work or any other aesthetic creation
whatsoever including cinematographic works and television productions;
 29 EP-ELL – December 2008
(l) a mere scheme or rule or method of performing mental act or method of playing
game;
(m) a presentation of information;
(n) topography of integrated circuits;
(o) an invention which in effect, is traditional knowledge or which is an aggregation
or duplication of known properties of traditionally known component or
components.
Answer 5(b)
Section 16 of the Environment (Protection) Act, 1986 deals with offences by the
companies and provides that where any offence has been committed by a company,
every person who, at the time the offence was committed, was directly in charge of, and
was responsible to, the company for the conduct of the business of the company, and
the company itself, shall be deemed to be guilty of the offence and shall be liable to be
proceeded against. When an offence has been committed by a company, and it is
proved that the offence was committed with the consent or connivance of any director,
manager, secretary or other officer of the company, such director, manager, secretary
or other officers shall also be deemed to be guilty of that offence and shall be liable to be
proceeded against and punished accordingly.
Answer 5(c)
Sangeetha will succeed in her claim. The facts of the case are similar to that of
Punjab National Bank v. K.B. Shetty (First Appeal No. 7 of 1991 decided on 6th August,
1991) In this case, the ornaments kept in the banks locker were found lost though the
certificate recorded by the custodian of the bank on the day the customer operated the
locker stated that all lockers operated during the day have been checked and found
properly locked. The National Commission, held that the bank guilty of negligence and
therefore, liable to make good the loss.
PART B
(Answer ANY TWO questions from this part.)
Question 6
Write notes on any four of the following :
(i) 'Employment injury' under the Employees' State Insurance Act, 1948.
(ii) 'Prohibition of employment of contract labour' under the Contract Labour
(Regulation and Abolition) Act, 1970.
(iii) 'Philosophy' behind the enactment of the Minimum Wages Act, 1948.
(iv) 'Manufacturing process' under the Factories Act, 1948.
(v) Matters within the jurisdiction of industrial tribunals constituted under the Industrial
Disputes Act, 1947.
(vi) Tests for determination of 'industry' under the Industrial Disputes Act, 1947.
(5 marks each)
EP-ELL – December 2008 30
Answer 6(i)
Employment Injury
Employment injury under Section 2(8) of the E.S.I. Act,1948 means “a personal
injury to an employee caused by accident or an occupational disease arising out of and
in the course of his employment, being an insurable employment, whether the accident
occurs or the occupational disease is contracted within or outside the territorial limits of
India”.
It is well settled that an employment injury need not necessarily be confined to any
injury sustained by a person within the premises or the concern where a person works.
Whether in a particular case the theory of notional extension of employment would take
in the time and place of accident so as to bring it within an employment injury, will have
to depend on the assessment of several factors. There should be a nexus between the
circumstances of the accident and the employment. On facts no case could be an
authority for another case, since there would necessarily be some differences between
the two cases. Therefore, each case has to be decided on its own facts. It is sufficient
if it is proved, that the injury to the employee was caused by an accident arising out of
and in the course of employment no matter when and where it occurred. There is not
even a geographical limitation. The accident may occur within or outside the territorial
limits of India. However, there should be a nexus or casual connection between the
accident and employment. The place or time of accident should not be totally unrelated
to the employment (Regional Director, E.S.I. Corpn. v. L. Ranga Rao, 1982 I-L.L.J. 29).
Where an employee who is on his way to factory meets with an accident, one K M
from the place of employment, the Court held that the injury cannot be said to be caused
by accident arising out of and in the course of his employment. Mere road accident on a
public road while employee was on his way to place of employment cannot be said to
have its origin in his employment in the factory (Regional Director ESI v. Francis de
Coasta, 1997 LLJ I 34 SC).
Answer 6(ii)
Prohibition of Employment of Contract Labour
Prohibition of employment of contract labour has been stipulated under Section 10
of the Contract Labour (Regulation and Abolition) Act, 1970. This is the most significant
provision in the Act. It empowers the appropriate Government to prohibit employment of
contract labour in any process, operation or other work in any establishment by issuing
a notification in the Official Gazette. However, before doing so it shall consult the Central
Board or the State Board as the case may be.
Considerations to be taken into account : Before issuing any notification under
Section 10 in relation to an establishment, the appropriate Government shall have regard
to the conditions of work and benefits provided for the contract labour in that establishment
and other relevant factors such as:
(a) whether the process, operation or other work incidental to, or necessary for the
industry, trade, business, manufacture or occupation that is carried on in the
establishment;
(b) whether it is of perennial nature, that is to say, it is of sufficient duration having
 31 EP-ELL – December 2008
regard to the nature of industry, trade, business, manufacture or occupation
carried on in that establishment;
(c) whether it is done ordinarily through regular workmen in that establishment or an
establishment similar thereto;
(d) whether it is sufficient to employ considerable number of whole time workmen.
The Explanation appended to the Section states that if a question arises whether
any process or operation or other work is of perennial nature, the decision of the appropriate
Government thereon shall be final.
Answer 6(iii)
Philosophy behind the enactment of the Minimum Wages Act, 1948
The Minimum Wages Act of 1948 is a landmark in the history of labour legislation in
the country. The philosophy of the Minimum Wages Act and its significance in the
context of conditions in India, has been explained by the Supreme Court in Unichoyi v.
State of Kerala (A.I.R. 1962 SC 12), as follows:
“What the Minimum Wages Act purports to achieve is to prevent exploitation of
labour and for that purpose empowers the appropriate Government to take steps to
prescribe minimum rates of wages in the scheduled industries. In an underdeveloped
country which faces the problem of unemployment on a very large scale, it is not unlikely
that labour may offer to work even on starvation wages. The policy of the Act is to
prevent the employment of such sweated labour in the interest of general public and so
in prescribing the minimum rates, the capacity of the employer need not to be considered.
What is being prescribed is minimum wage rates which a welfare State assumes every
employer must pay before he employs labour”.
Answer 6(iv)
Manufacturing Process
Section 2(k) of the Factories Act, 1948 defines 'manufacturing process'. It means
any process for :
(i) making, altering, repairing, ornamenting, finishing, packing, oiling, washing,
cleaning, breaking up, demolishing, or otherwise, treating or adopting any article
or substance with a view to its use, sale, transport, delivery or disposal; or
(ii) pumping oil, water or sewage or any other substance; or
(iii) generating, transforming, transmitting power; or
(iv) composing types for printing, printing by letter-press, lithography, photogravure
or other similar process, or book-binding; or
(v) constructing, reconstructing, repairing, refitting, finishing or breaking up ships
or vessels; or
(vi) preserving or storing any article in cold storage.
The definition is quite important and it has been the subject of judicial interpretation
in large number of cases. The Madras High Court in the case of In re. Seshadrinatha
Sarma 1966 (2) LLJ 235, held that to constitute a manufacture there should not be essentially
EP-ELL – December 2008 32
some kind of transformation of substance and the article need not become commercially
as another and different article from that at which it begins its existence so long as there
has been an indisputable transformation of substance by the use of machinery and
transformed substance in commercially marketable.
The Division Bench of A.P. High Court held that to determine where certain premises
is a factory, it is necessary that it should carry on manufacturing process and it does not
require that the process should end in a substance being manufactured (Alkali Metals (P)
Ltd. v. ESI Corpn., 1976 Lab.I.C.186). In another case it was observed that manufacturing
process merely refers to particular business carried on and does not necessarily refer to
the production of some article. The works of laundry and carpet beating were held to
involve manufacturing process. A process employed for purpose of pumping water is
manufacturing process. Each of the words in the definition has got independent meaning
which itself constitutes manufacturing process.
Answer 6(v)
Matters within the jurisdiction of Industrial Tribunals
As per Section 7A of the Industrial Disputes Act, 1947 the appropriate Government
may, by notification in the Official Gazette, constitute one or more Industrial Tribunals
for the adjudication of industrial disputes relating to any matter, whether specified in the
Second Schedule or the Third Schedule and for performing such other functions as may
be assigned to them under this Act
The Third Schedule of the Industrial Disputes Act, 1947 deals with matters within
the jurisdiction of Industrial Tribunals. These are as follows:-
1. Wages, including the period and mode of payment;
2. Compensatory and other allowances;
3. Hours of work and rest intervals;
4. Leave with wages and holidays;
5. Bonus, profit sharing, provident fund and gratuity;
6. Shift working otherwise than in accordance with standing orders;
7. Classification by grades;
8. Rules of discipline;
9. Rationalization;
10. Retrenchment of workmen and closure of establishment; and
11. Any other matter that may be prescribed.
Answer 6(vi)
Industry
As per Section 2(j) of the Industrial Disputes Act, 1947 industry means “any business,
trade, undertaking, manufacture or calling of employers and includes any calling service,
employment, handicraft, or industrial occupation or avocation of workmen”.
 33 EP-ELL – December 2008
The Supreme Court carried out an in-depth study of the definition of the term industry
in a comprehensive manner in the case of Bangalore Water Supply and Sewerage Board
v. A Rajiappa, AIR 1978 SC 548 after considering various previous judicial decisions on
the subject and in the process, it rejected some of them, while evolving a new concept
of the term industry.
Tests for determination of industry
After discussing the definition from various angles in the above case, the Supreme
Court laid down the following tests to determine whether an activity is covered by the
definition of industry or not. It is also referred to as the triple test.
I. (a) Where there is (i) systematic activity, (ii) organised by co-operation between
employer and employee, (iii) for the production and/or distribution of goods
and services calculated to satisfy human wants and wishes (not spiritual or
religious but inclusive of material things or services geared to celestial bliss
e.g., making, on a large scale, prasad or food) prima facie, there is an
industry in that enterprise.
(b) Absence of profit motive or gainful objective is irrelevant wherever the
undertaking is whether in the public, joint, private or other sector.
(c) The true focus is functional and the decisive test is the nature of the activity
with special emphasis on the employer-employee relations.
(d) If the organisation is a trade or business, it does not cease to be one
because of philanthrophy animating the undertaking.
II. Although Section 2(i) uses words of the widest amplitude in its two limbs, their
meaning cannot be magnified to over-stretch itself. Undertaking must suffer a
contextual and associational shrinkage, so also, service, calling and the like.
This yields the inference that all organised activity possessing the triple elements
in (i) although not trade or business, may still be industry, provided the nature of
the activity, viz., the employer - employee basis, bears resemblance to what we
find in trade or business. This takes into the fold of industry, undertaking, callings
and services, adventures analogous to the carrying on of trade or business. All
features, other than the methodology of carrying on the activity, viz., in organising
the co-operation between employer and employee, may be dissimilar. It does
not matter, if on the employment terms, there is analogy.
III. Application of these guidelines should not stop short of their logical reach by
invocation of creeds, cults or inner sense of incongruity or outer sense of
motivation for or resultant of the economic operations. The ideology of the Act
being industrial disputes between employer and workmen, the range of this
statutory ideology must inform the reach of the statutory definition, nothing
less, nothing more.
Hence, the Supreme Court observed that professions, clubs, educational
institutions. co-operatives, research institutes, charitable projects and other
kindred adventures, if they fulfil the triple tests listed in (I), cannot be exempted
from the scope of Section 2(j). A restricted category of professions, clubs, co-
operatives and gurukulas and little research labs, may qualify for exemption if,
EP-ELL – December 2008 34
in simple ventures, substantially and going by the dominant nature criterion,
substantively, no employees are entertained but in minimal matters, marginal
employees are hired without destroying the non-employee character of the unit.
Question 7
(a) Distinguish between any two of the following :
(i) 'Principal employer' and 'immediate employer' under the Employees' State
Insurance Act, 1948.
(ii) 'Individual dispute' and 'industrial dispute' under the Industrial Disputes Act,
1947.
(iii) 'Partial disablement' and 'total disablement' under the Workmen's
Compensation Act, 1923. (5 marks each)
(b) Re-write the following sentences after filling-up the blank spaces with appropriate
word(s)/figures :
(i) Minimum wages are to be fixed on the basis of standard normal working
hours namely ______________ hours a week.
(ii) Every employee shall be entitled to be paid by his employer in an accounting
year, bonus, provided he has worked in the establishment for not less than
_____________ working days in that year.
(iii) _________ means the temporary closing of a place of employment or
suspension of work or the refusal by an employer to continue to employ any
number of persons employed by him.
(iv) ____________ means the termination by the employer of the services of a
workman for any reason whatsoever otherwise than as a punishment inflicted
by way of disciplinary action.
(v) The Trade Unions Act, 1926 provides for the ___________ of an unfair
labour practice either by the employer or the trade unions or workmen.
(1 mark each)
(c) Choose the most appropriate answer from the given options in respect of the
following :
(i) To make an employer liable under the Workmen's Compensations Act, 1923,
it is necessary that the injury is caused by an accident which must arise —
(a) Out of employment
(b) In the course of employment
(c) Out of employment and in the course of employment
(d) By any other reason.
(ii) An insured person under the Employees' State Insurance Act, 1948 is entitled
to receive certain benefits. But the insured person is —
(a) Not entitled to receive more than one benefit for the same period
 35 EP-ELL – December 2008
(b) Entitled to receive more than one benefit for the same period on
compassionate grounds
(c) Entitled to receive one benefit partly in cash and receive the other benefit
in kind for the same period
(d) Entitled to receive more than one benefit on proof of authorities
concerned.
(iii) Under the Payment of Gratuity Act, 1972 where the services of an 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, the gratuity payable to the employee may be —
(a) Wholly or partially forfeited
(b) Only partially forfeited
(c) Wholly forfeited
(d) Forfeited in instalments.
(iv) Under the Contract Labour (Regulation and Abolition) Act, 1970, the principal
employer of an establishment can employ contract labour if —
(a) The principal employer has not obtained the certificate of registration
(b) The work is of urgent nature
(c) The work is not of perennial nature
(d) The work provides instant employment to a considerable number of
unemployed persons.
(v) A premises including precincts thereof is a 'factory' within the meaning of
the Factories Act, 1948 wherein a manufacturing process is being carried
on with the aid of power and where the number of workers working is —
(a) 10 or more workers
(b) 20 or more workers
(c) 15 or more workers
(d) 50 or more workers. (1 mark each)

Answer 7(a)(i)

Immediate employer & principal employer under E.S.I.Act, 1948

According to Section 2(13) of the E.S.I. Act, 1948 “immediate employer”, in relation
to employees employed by or through him, means a person who has undertaken the
execution on the premises of a factory or an establishment to which this Act applies or
under the supervision of principal employer or his agent, of the whole or any part of any
work which is ordinarily part of the work of the factory or establishment of the principal
employer or is preliminary to the work carried on, in or incidental to the purpose of any
such factory or establishment, and includes a person by whom the services of an
employee who has entered into a contract of service with him are temporarily lent or let
on hire to the principal employer and includes a contractor.
EP-ELL – December 2008 36
“Principal Employer” as per Section 2(17) of the Act means the following:
(i) in a factory, owner or occupier of the factory and includes the managing agent
of such owner or occupier, the legal representative of a deceased owner or
occupier and where a person has been named as the manager of the factory
under the Factories Act, 1948, the person so named;
(ii) in any establishment under the control of any department of any Government in
India, the authority appointed by such Government in this behalf or where no
authority is so appointed the head of the Department.
(iii) in any other establishment, any person responsible for the supervision and
control of the establishment.
Answer 7(a)(ii)
Individual dispute and industrial dispute
Industrial dispute under Section 2(k) of the Industrial Disputes Act, 1947 means”
any dispute or difference between employers and employers, or between employers and
workmen, or between workmen and workmen, which is connected with the employment
or non-employment or the terms of employment or with the conditions of labour, of any
person.”
Till the provisions of Section 2-A (dismissal, etc., of an individual workman to be
deemed to be an industrial dispute) were inserted in the Industrial Disputes Act, 1947, it
has been held by the Supreme Court that an individual dispute per se is not an industrial
dispute. But it can develop into an industrial dispute when it is taken up by the union or
substantial number of workmen (Central Province Transport Service v. Raghunath
Gopal Patwardhan, AIR 1957 S.C. 104). This ruling was confirmed later on in the case
of Newspaper Ltd. v. Industrial Tribunal.
In the case of Workmen of Dimakuchi Tea Estate v. Dimakuchi Tea Estate (1958)
I. L.L.J. 500, the Supreme Court held that it is not that dispute relating to `any person
can become an industrial dispute. There should be community of interest. A dispute
may initially be an individual dispute, but the workmen may make that dispute as their
own, they may espouse it on the ground that they have a community of interest and are
directly and substantially interested in the employment, non-employment, or conditions
of work of the concerned workmen. All workmen need not to join the dispute. Any
dispute which affects workmen as a class is an industrial dispute, even though, it might
have been raised by a minority group.
The only condition for an individual dispute turning into an industrial dispute, as laid
down in the case of Dimakuchi Tea Estate is the necessity of a community of interest
and not whether the concerned workman was or was not a member of the union at the
time of his dismissal.
Answer 7(a)(iii)
Partial disablement and total disablement
Disablement means loss of capacity to work or to move. The Workmen’s
Compensation Act, 1923 does not define the word ‘disablement’, but defines partial
disablement under Section 2(1)(g). Partial disablement may be temporary or permanent.
 37 EP-ELL – December 2008
"Partial disablement" means, where the disablement is of a temporary nature, such
disablement as reduces the earning capacity of a workman in any employment in which
he was engaged at the time of the accident resulting in the disablement, and, where the
disablement is of a permanent nature, such disablement as reduces his earning capacity
in every employment which he was capable of undertaking at that time. [Section 2(1)(g)]
The distinction between these two types of disablement depends on the fact as to
whether an injury results in reduction of earning capacity in all the employments which
the workman was capable of undertaking or only in that particular employment in which
he was engaged at the time of injury. The type of disablement suffered can be determined
only from the facts of a case. But it is provided by the Act that injuries specified in Part
II of Schedule I shall be deemed to result in permanent partial disablement. These
injuries are known as scheduled injuries.
Total disablement : Total disablement can also be classified as temporary total
disablement and permanent total disablement.

"Total disablement" means such disablement, whether of a temporary or permanent

nature, as incapacitates a workman for all work which he was capable of performing at
the time of the accident resulting in such disablement provided that permanent total
disablement shall be deemed to result from every injury specified in Part I of Schedule
I or from any combination of injuries specified in Part II thereof where the aggregate
percentage of the loss of earning capacity, as specified in the said Part II against those
injuries, amounts to one hundred per cent or more. [Section 2(1)(l)]

Answer 7(b)

(i) 48 Hours

(ii) 30 Days

(iii) Lay-off

(iv) Retrenchment

(v) Prohibition (Read Industrial Disputes Act, 1947)

Answer 7(c)(i)

(c) Out of employment and in the course of employment

Answer 7(c)(ii)

(a) Not entitled to receive more than one benefit for the same period

Answer 7(c)(iii)

(a) Wholly or partially forfeited

Answer 7(c)(iv)

(c) The work is not of perennial nature

EP-ELL – December 2008 38
Answer 7(c)(v)
(a) 10 or more workers.
Question 8
Attempt any five of the following stating relevant legal provisions and case law, if
any :
(i) A contractor made short payment of wages to a worker employed by him as
contract labour. The worker sought the amount due from the principal employer.
Will he succeed ?
(ii) The services of workmen engaged on casual basis for doing a particular urgent
work were terminated after the completion of the said work. Workmen sought
compensation as the termination amounted to retrenchment. Will they succeed?
(iii) Workmen of an electricity generation station claimed that their unit is covered
under the definition of 'factory' considering the process of transforming and
transmission of electricity generated at the power station as a 'manufacturing
process'. Will their claim succeed ?
(iv) An employee contended that subsistence allowance given during the period of
his suspension should be included in his total wages for the purpose of calculation
of bonus entitlement. Will he succeed ?
(v) The company declined to pay gratuity to a deceased employee's wife stating
that the employee had worked for two years only whereas eligibility for receiving
gratuity accrues only if he served for a period of five completed years of
continuous service. Will she succeed ?
(vi) An establishment discontinued deduction towards contribution to provident fund
from its employees' salary and stopped remitting contribution of its share of
provident fund when the number of its employees on rolls fell to fifteen. Do the
provisions of the Employees' Provident Funds and Miscellaneous Provisions
Act, 1952 cease to be applicable to the establishment under such circumstances?
(vii) A workman, who was a carpenter, had to get his left arm amputated from elbow
in an injury caused in the course of employment. The company paid
compensation towards partial permanent disablement. The workman demanded
compensation claiming it to be total disablement. Will the workman succeed ?
(4 marks each)
Answer 8(i)
The worker will succeed. Section 21 (1) of the Contract Labour (Regulation & Abolition)
Act, 1970 provides that a contractor shall be responsible for payment of wages to each
worker employed by him as contract labour and such wages shall be paid before the
expiry of such period as may be prescribed.
Under Section 21(4) of the Act, it has been provided that if the contractor fails to
make payment of wages within the prescribed period or makes short payment, then the
principal employer shall be liable to make payment of wages in full or the unpaid balance
due, as the case may be, to the contract labour employed by the contractor and recover
 39 EP-ELL – December 2008
the amount so paid from the contractor either by deduction from any amount payable to
the contractor under any contract or as a debt payable by the contractor.
Answer 8(ii)
The workmen will not succeed. The Calcutta High court in Tapan Kumar v. the
General Manager Calcutta Telephones, (1980) Lab.I.C.508) has held that where the
workmen were engaged on casual basis for doing only a particular urgent work, the
termination of their service after the particular work is over, is not a retrenchment.
Answer 8(iiI)
The workmen will not succeed. The Supreme Court in Workmen of Delhi Electric
Supply Undertaking v. Management of D.E.S.U., AIR 1973 S.C. 365 has held that the
process undertaken in zonal and sub-stations and electricity generating stations,
transforming and transmitting electricity generated at the power station does not fall
within the definition of manufacturing process and could not be said to be factories.
Answer 8(iv)
The employee will not succeed. It has been held in the case of Motor Industries
Co.Ltd. v. Popat Muralidhar Patil & Ors, (1997) I CLR 169 Bom. that bonus is not
payable on subsistence allowance firstly because the employee does not actually work
during that period and secondly because the subsistence allowance cannot be considered
as salary or wage.
Answer 8(v)
The wife of the deceased will succeed. According to Section 4(1) of the Payment of
Gratuity Act, 1972, gratuity shall be payable to an employee on the termination of his
employment after he has rendered continuous service for not less than five years:
(a) on his superannuation, or
(b) on his retirement or resignation, or
(c) on his death or disablement due to accident or disease.
It is further provided under the proviso that the completion of continuous service of
five years is not necessary where the termination of the employment of any employee is
due to death or disablement.
Answer 8(vi)
No. According to Section 1(5) of the EPF Act, 1952 once an establishment falls
within the purview of the Act, it shall continue to be governed by this Act notwithstanding
that the number of persons employed therein at any time falls below twenty.
Answer 8(vii)
The workman will succeed. It is a total disablement as per the Supreme Court
decision in Pratap Narain Singh Deo v. Sriniwas Sabata (1976) I L.L.J.235.
In this case, a workman who was a carpenter had amputated his left arm from elbow
in an injury. It was held by the Supreme Court that it is a total disablement as the
carpenter cannot carry his work with one hand and not a partial permanent disablement.
EP–SLC –December 2008 40
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) Sweat equity shares are allotted to employees of a company as gift for their
performance.
(ii) Continuing disclosure by listed companies under the SEBI Takeover Code
affects the market price of company’s shares.
(iii) In case of rolling settlement, the delivery of funds and securities is settled
on T+2 basis.
(iv) The Central Government cannot privately place the government securities
with the Reserve Bank of India.
(v) Listing of securities with stock exchanges is a matter of great importance.
(2 marks each)
(b) Choose the most appropriate answer from the given options in respect of the
following :
(i) The responsibility for regulating the securities market is not shared by
the —
(a) SEBI
(b) Reserve Bank of India
(c) Stock Exchanges
(d) Ministry of Corporate Affairs.
(ii) The mechanism for employees to report to the management certain events
like, unethical behaviour, suspected fraud or violation of the company’s
code of conduct is known as —
(a) Whistle blower policy
(b) Surveillance action
(c) Market abuse
(d) Snap investigation.
(iii) The money market instrument which is issued in the form of a promissory
note is called —
(a) Commercial bill
(b) Commercial paper
(c) Treasury bill
(d) Unit issued by a ‘money market mutual fund’ (MMMF).

40
 41 EP–SLC – December 2008
(iv) Before 1992, the authority which used to regulate and deal with the stock
market was the —
(a) Reserve Bank of India
(b) Controller of Capital Issues
(c) Registrar of Companies
(d) SEBI.
(v) Stock brokers and sub-brokers are required to be registered with the —
(a) SEBI
(b) Stock exchanges
(c) Registrar of Companies
(d) Both (a) and (b). (1 mark each)
Answer 1(a)(i)
True : Under Section 79A of The Companies Act 1956, sweat equity share is a
instrument permitted to be issued by specified Indian Companies. Sweat equity shares
are allotted to all employees of Companies or Directors as may be decided by Board of
Directors of that particular issuer Company as a reward for the best services rendered;
at a nominal price or a lower discounted price or at free of cost to further encourage them
to put their best efforts for providing know how in the nature of intellectual property
rights.
Answer 1(a)(ii)
False : In fact Continuing disclosures standards has enabled companies for quicker
dissemination of information to investors. It provides the investors reasonable access
to the information to judge the performance of the Company.
Answer 1(a)(iii)
True : In case of rolling settlements the delivery of funds and securities is settled
on T+2 basis. Transactions are settled on the 2nd day of the day of Transaction. So if
transaction takes place on Monday then the settlement will be done on Wednesday.
Answer 1(a)(iv)
False : The Central Government may also privately place government securities
with RBI. This is usually done when the ways and means of advance is near the
sanctioned limit and market conditions are not conducive to an issue.
Answer 1(a)(v)
True : Listing of securities with stock exchange is a matter of great importance for
companies and investors, because this provides the liquidity to the securities in the
market, improves its public image, helps in commanding better support such as loans
and investment from Banks/Financial Institutions and compels the company management
to disclose important information to the investors enabling them to make crucial decisions.
EP–SLC –December 2008 42
Answer 1(b)
(i) (d) Ministry of Corporate Affairs
(ii) (a) Whistle blower policy
(iii) (b) Commercial Paper
(iv) (b) Controller of Capital Issues
(v) (a) SEBI
Question 2
(a) Write short notes on the following :
(i) Securities lending
(ii) Fungibility
(iii) Custodian of securities. (3 marks each)
(b) Expand the following abbreviations :
(i) OMO
(ii) FSO
(iii) STR. (1 mark each)
(c) What are the securities which are not available for buy-back ? (3 marks)
Answer 2(a)(i)
Securities Lending
Securities lending are regulated by SEBI. Under this scheme a person with idle
shares can lend them to another who does not have the shares to fulfill his obligation
under a trade finalized by him. There will be no direct contracts between the borrower
and lender of securities.
Answer 2(a)(ii)
Fungibility
The Depositories Act, 1996 envisages that all securities held in depository shall be
fungible i.e., all certificates of the same security shall become interchangeable in the
sense that investor loses the right to obtain the exact certificate he surrenders at the
time of entry into depository. It is like withdrawing money from the bank without bothering
about the distinctive numbers of the currencies.
Answer 2(a)(iii)
Custodian of Securities
Custodian of securities means any person who carries on or proposes to carry on
the business of providing custodial services. The term “custodial services” in relation to
securities means safekeeping of securities of a client and providing services incidental
thereto, and includes –
(i) maintaining accounts of securities of a client;
 43 EP–SLC – December 2008
(ii) collecting the benefits of rights accruing to the client in respect of securities;
(iii) keeping the client informed of the actions taken or to be taken by the issuer of
securities, having a bearing on the benefits or rights accruing to the client; and
(iv) maintaining and reconciling records of the services referred to in points (i) to
(iii).
Answer 2(b)
(i) OMO - Open Market Operations
(ii) FSO – Foreign Structured Obligations
(iii) STR – Suspicious Transaction Reporting
Answer 2(c)
The following Securities are not available for buy-back :
(i) Securities in lock-in period : Securities in lock-in period as per SEBI guidelines
are not available for buyback until the lock-in period expires.
(ii) Non-transferable Securities : Securities which are under lien or are pledged or
restricted by Court.
(iii) Disputed Securities kept in abeyance : Securities which are under dispute and
have kept in abeyance under section 206A or in respect of which transfer or
transmission has not been effected.
Question 3
(a) Distinguish between any two of the following :
(i) ‘Primary market’ and ‘secondary market’.
(ii) ‘Close ended schemes’ and ‘open ended schemes’.
(iii) ‘Disaster bonds’ and ‘dual convertible bonds’. (3 marks each)
(b) “Capital market intermediaries are a vital link between the SEBI and investors in
a public issue.” Comment. (5 marks)
(c) Explain the following grading scales for healthcare institutions given by CRISIL:
(i) Grade A
(ii) Grade B
(iii) Grade C
(iv) Grade D. (1 mark each)
Answer 3(a)(i)
‘Primary Market’ and ‘Secondary Market’
The primary market provides the channel for mobilizing resources. Secondary market
deals in securities which were already issued in primary market or which securities have
already raised resources from the primary market earlier.
EP–SLC –December 2008 44
In primary market the issue of securities may be through an IPO, Further issue of
Capital, Right issue, offer to public, Bonus issue, offer of securities under reservation,
firm allotment basis to foreign collaborators, partners, mutual funds, merchant bankers,
employees etc. The Secondary market deals with such securities which have already
listed an stock Exchanges of any category subject to look in conditions. The primary
market creates and offers merchandise for secondary market, which secondary market
ensures relative safety in trading as the instruments are traded through stock exchange
mechanism.
Answer 3(a)(ii)
‘Close Ended Schemes’ and ‘Open Ended Schemes’

Close Ended Schemes Open Ended Schemes

1. Fixed Corpus : No new units can be Variable corpus due to on going

offered beyond the limit purchase and redemption
2. Listed on stock exchange for buying No listing on exchange transactions
and selling or dealings done directly with the fund
3. Two values are available viz. : NAV Only NAV is available as one price
and the market trading price
4. Mostly liquid Highly liquid

Answer 3(a)(iii)
‘Disaster Bonds’ and ‘Dual Convertible Bonds’
Disaster Bonds are issued by companies and Institutions to share the risk and
expand the capital to link investors return with the size of insurer losses. The bigger the
losses the smaller the return and vice-versa. The coupon rate and the principal of the
bonds are decided by the occurrence of the casualty of disaster and by the possibility of
borrowers defaults.
A dual convertible bond is convertible into either equity shares or fixed interest rate
debentures/preference shares at the option of the lender. Depending on the prospectus
of the project during the conversion period, the lender may exercise either of the options.
The fixed interest rate debenture may have certain additional features including higher
rate of interest distinct from the original debt instrument.
Answer 3(b)
Capital market intermediaries are a vital link between the regulator, issuers and
investor. Any aberrations in the capital market has presumably direct bearing on the
intermediaries their governance process and practices which in turn affect the confidence
of market. It is therefore, necessary to ensure good governance practices of the
intermediaries and also to have constant monitoring and surveillance on the acts of
intermediaries. SEBI has issued regulations in respect of each intermediary to ensure
proper services to be rendered by them to the investors and the capital market. As per
Section 11 of SEBI Act. It is the duty of SEBI to register and regulate the Intermediaries
in primary and secondary market. SEBI has also issued Regulation, 2008, to put in
place a comprehensive framework which will apply to the intermediaries. The new
 45 EP–SLC – December 2008
regulation provided for all intermediaries to register and regulate, the permanent
registration, multiple activities registration form, fit and proper person criteria, suspension
and cancellation of certificate of registration.
Answer 3(c)
(i) Grade - A – Reflects very good quality of delivered patient care. A healthcare
institutions graded in this category has highest standards in Indian health care.
(ii) Grade - B – Reflects good quality of delivered patient care and have facilities
lower to grade A
(iii) Grade - C – Reflects average Quality of delivered patient care and improvement
in specific areas would be required for such hospital.
(iv) Grade - D – Reflects poor quality of delivered patient care. Infrastructure of
hospital is poor quality and below average standard.
Question 4
(a) What are the obligations of a capital market intermediary under the Prevention
of Money Laundering Act, 2002 ? (5 marks)
(b) List out any four clauses of listing agreement. (5 marks)
(c) “Depository system is a boon to capital market and investors, both.” Elucidate
the statement and bring out the advantages of the dematerialisation of securities.
(5 marks)
Answer 4(a)
Obligations of Intermediaries under Prevention of Money Laundering Act, 2002
Under section 12 of Prevention of Money Laundering Act, 2002, there are certain
obligations casted on an intermediary to :
(i) Maintain a second of all transactions, the nature and value of which may be
prescribed whether such transactions comprise of a single transaction or a
series of transactions integrally connected to each other and where such series
of transactions take place within a month.
(ii) Furnish information of transaction to the Director within such time as may be
prescribed.
(iii) Verify and maintain records of the identity of all its clients in such a manner as
may be prescribed.
All intermediaries are required to ensure that a proper policy framework as per the
Guidelines on anti-money laundering measures is put into place. The intermediaries are
also required to designate an officer as ‘Principal Officer’ who would be responsible for
ensuring compliance of the provisions of the Prevention of Money Laundering Act, 2002.
Answer 4(b)
Clauses of Listing Agreement
(i) Clause – 13. Notification of any attachment or prohibiting orders against transfer
of securities
EP–SLC –December 2008 46
(ii) Clause – 16. Book closure or Record date – At least once in a year the books
should be closed. Gap between two book closures and or record dates would
be at least 30 days.
(iii) Clause – 19. Convening of Board Meeting for decision on Dividend, Bonus,
Rights, convertible debentures, buy-back of securities.
(iv) Clause – 31. Further issue of securities and other documents to be forwarded –
To forward the Stock Exchange 6 copies of Annual Reports, notices, resolutions
and circulars relating to new issue of capital, including notices under sections
391 or 394 read with section 391 of the Companies Act, 1956. Copies of all
proceedings of EGMs/AGMs along with notices and explanatory statements
etc.
(v) Clause – 32. Preparation of cash flow statement in accordance with AS-3 of
ICAI & related party transactions.
(vi) Clause – 35. Shareholding pattern containing details of promoters’ holdings and
non-promoter holdings.
(vii) Clause – 41. Preparation and submission of quarterly financial statements.
(viii) Clause – 49. Corporate Governance & its compliances
(ix) Clause – 50. Adoption of Accounting Standards as per norms stipulated by
ICAI.
(x) Clause – 51. EDIFAR - to be filed/uploaded on Stock Exchanges/SEBI websites.
NOTE : IMPORTANT CLAUSES HAVE BEEN MENTIONED IN THE ANSWER.
STUDENTS ARE REQUIRED TO ANSWER ANY FOUR.
Answer 4(c)
Depository system is a boon to capital market and investors both. Depositories
gave a new dimension and a new scope for conducting transactions in capital market-
primary as well as secondary, in a more efficient and effective manner, in a paperless
form on an electronic book entry basis. It provided electronic solution to the
aforementioned problems of bad deliveries and long settlement cycles.
The main benefits of a depository is to minimize the paper work involved with the
owner, trading and transfer of securities. In the depository system, the ownership and
transfer of securities takes place by means of electronic book entries. At the outset,
this system rids the capital market of the dangers related to handling of paper through
dematerialization which results in advantages :
(i) Elimination of bad deliveries
(ii) Elimination of all risks associated with physical certificates.
(iii) Immediate transfer and registration of securities.
(iv) Faster disbursement of non-cash corporate benefits like rights, bonus, etc.
(v) Reduction in brokerage by many brokers for trading in dematerialized securities.
 47 EP–SLC – December 2008
(vi) Reduction in handling of huge volumes of paper and periodic status reports to
investors;
(vii) Elimination of problems related to change of address of investor transmission
etc.
Question 5
(a) Define ‘NAV’ and ‘offer price’. If Rahul invests Rs.10,000 in a scheme that
charges 2% front end load at an NAV of Rs.10 per unit, what shall be the public
offer price? (5 marks)
(b) What are the pre-requisites for ‘option trading’ ? Explain the issues connected
with option trading. (5 marks)
(c) Explain the concept of ‘collective investment scheme’. State briefly the
obligations of trustees. (5 marks)
Answer 5(a)
Net Asset Value
Net asset value is the value of the assets of each unit of the scheme. Thus if the
NAV is the more than the face value of Rs.10/- , there is an appreciation for the investment.
If the NAV is less than the face value, it indicates depreciation of the investment. NAV
also includes dividends, interest accruals and reduction of liabilities and expenses apart
from market value of investments.
Offer Price : Offer Price is the price obtain by dividing Net Asset Value of the
scheme by 1 - front and load.
Public Offer Price = Net Asset Value ÷ (1- Front end load)
Solution :
Public Offer Price = Net Asset Value ÷ (1- Front end load)

Rs.10
i.e. = Rs.10.20
(1 − 0.02)

Answer 5(b)
The most important pre-requisite for option trading is proper infrastructure and writers
of options. Institutional infrastructure has to be developed. This will require writers of
options, who are speculators willing to take risk for high rewards. The successful
functioning of option trading require following pre-requisite.
— standardization of the terms of contract
— careful selection of underlying securities
— appointment of second market maker
— setting up efficient option clearing house
— creation of a central market
EP–SLC –December 2008 48
There are legislative measures in the USA and European countries to check abuses
of option trading without undermining its usefulness. In India sentiment call away the
market and the volume could go up to the unsustainable level. As such checks and
balances have to be provided to bring the market back to normal.
Answer 5(c)
Collective investment scheme means any scheme or arrangement made or offered
by any company under which the contributions or payments made by the investors by
whatever name called are pooled and utilized solely for the purposes of the scheme or
arrangement.
The obligations of trustee include ensuring that the Collective Investment Management
Company has :
(i) the necessary office infrastructure;
(ii) appointed all key personnel including managers for the schemes and submitted
their bio-data which shall contain the educational qualifications and past
experience in the areas relevant for fulfilling the objectives of the schemes;
(iii) taken adequate steps to ensure that the interest of investors of one scheme are
not compromised with the object of promoting the interest of investors of any
other scheme.
(iv) maintained minimum net worth on a continuous basis and has informed SEBI
immediatelyof any shortfall;
(v) been diligent in empanelling the marketing agents and in monitoring their
activities.
The trustees are accountable for and are the custodian of the funds and property of
the respective schemes and should hold the same in trust for the benefit of the unit
holders in accordance with these regulations and the provisions of trust deed.
The trustee should review on a quarterly basis every year all activities carried out by
the Collective Investment Management Company. The trustee should also report to
SEBI any breach of these regulations and has had, or is likely to have a materially
adverse effect on the interests of unit holders as soon as they become aware of the
breach.
PART B
(Answer ANY TWO questions from this part)
Question 6
(a) What is ‘initial public offering’ (IPO) grading ? Explain the procedure for IPO
grading. (5 marks)
(b) What is ‘green shoe option’ ? Explain its significance. (5 marks)
(c) List out the various approvals required for issuance of ‘Global Depository Receipts’
(GDRs) and the documentation required therefor. (5 marks)
(d) Explain the procedure adopted for approval of ‘basis of allotment’ by the stock
exchanges. (5 marks)
 49 EP–SLC – December 2008
Answer 6(a)
IPO (Initial Public Offering) grading is a service aimed at facilitating the assessment
of Equity issues offered to public. The grade assigned to any individual issue represents
a relative assessment of the fundamental of that issue in relation to the universe of
other listed equity securities. In India such grading is assigned on a five point scale with
a higher score indicating stronger fundamental. Credit rating agencies registered with
SEBI carry out IPO grading. The grading does not have any ongoing validity. The
company first appoints grading agencies and mandates it for grading exercise. The
agency will follows the process outlined below :
— seek information for grading from the company
— visit company operation for discussions
— prepare analytical assessment report
— present analysis to committee comprising top official of company & grading
agency
— communicate the grade to the company with assessment report
Answer 6(b)
Green Shoe Option means an option of allocating shares in excess of the shares
included in the public issue and operating a post-listing price stabilizing mechanism in
accordance with SEBI (DIP) Guidelines 2000.
A company making a public offer of equity shares and desirous of availing this
option, should in the resolution of the general meeting authorizing the public issue, seek
authorization also for the possibility of allotment of further shares to the ‘Stabilizing
Agent’ (SA) at the end of the stabilization period.
The Significance of Green Shoe Option is that it helps in stabilizing post listing price
of the shares.
The company should appoint one of the merchant bankers or book runners, amongst
the issue management team, as SA, who will be responsible for the price stabilization
process, if required. The SA shall enter into an agreement with the issuer company,
prior to filing of offer document with SEBI, clearly stating all the terms and conditions
relating to this option including fees charged/expenses to be incurred by SA for this
purpose.
Answer 6(c)
Various approvals required for issuance of Global Depository Receipts
(i) Approval of the Board of Directors
(ii) Approval of shareholders.
(iii) Two stage approval of Ministry of Finance—In principle and Final
(iv) Approval of Ministry of Corporate Affairs
(v) Approval of Reserve Bank of India.
(vi) In principle consent of Stock Exchange for listing of underlying shares.
(vii) In principle consent of Financial Institutions.
EP–SLC –December 2008 50
Documentation required for issuance of Global Depository Receipts :
(i) Subscription Agreement
(ii) Depository Agreement
(iii) Custodian Agreement
(iv) Agency Agreement\
(v) Trust Deed.
Answer 6(d)
In case of public issue of Securities, the Executive Director/Managing Director of
the designated Stock Exchange along with post issue lead merchant banker an the
Registrar to the issue is responsible to ensure that the basis of allotment is finalized in
a fair and proper manner in accordance with guidelines. Chapter XI of SEBI guidelines
shall be applicable for book building portion of a book built public issue.
To finalise basis of allotment in case of issues oversubscribed by ‘n’ number of
times, the system of lots is applicable where a public representative of designated
stock exchange indicate lot number of successful applicants; which shall be issued by
ED/MD of such Exchange as correct in addition to lead merchant banker, Registrar to
the issue and the company’s authorized Representative. Once allotment is approved,
the company should take all necessary formalities for listing including publication of
basis of allotment as per listing agreement and comply further formalities within 7 days
of finalization of basis of allotment including refund orders and credit of shares to investors
account etc.
Question 7
(a) Explain any three of the following terms relating to debt market in India :
(i) Benchmarked instruments
(ii) Inflation linked bonds
(iii) Pass through certificates
(iv) Floating interest rate. (2 marks each)
(b) What is meant by the following in a public issue :
(i) Subscription list
(ii) Issue opening date
(iii) Mandatory collection centre ? (3 marks each)
(c) What is the ‘investor education and protection fund’ (IEPF) ? Briefly explain its
activities as stipulated under the IEPF Rules. (5 marks)

Answer 7(a)(i)
Benchmarked Instruments
These are certain debt instruments wherein the fixed income earned is based on a
benchmark. For instance the floating interest rate funds are benchmarked to either the
LIBOR or MIBOR.
 51 EP–SLC – December 2008
Answer 7(a)(ii)
Inflation Linked Bond
A bond is considered indexed for inflation if the payment on the instrument is indexed
by reference to the change in the value of a general price index over the term of the
instrument.
Answer 7(a)(iii)
Pass Through Certificates
When mortgages are pooled together and undivided interest in the pool are sold,
pass through securities certificates are created.
Answer 7(a)(iv)
Floating Interest Rate
Floating interest rate simply means that the rate of interest is variable. The interest
rate payable for the next period is set with reference to a benchmark market rate agreed
upon by both the lender and borrower.
Answer 7(b)(i)
Subscription List : It must be kept open for minimum period of 3 working days and
not more than 10 working days and the operation of subscription list be disclosed in the
prospects. In case of infrastructures companies it should be kept open for 21 days and
for Rights at least 30 days but not more than 60 days. In case of designated financial
institutions, subscription list for public issues shall be kept open for a minimum 3 working
days and maximum 21 working days which should be disclosed in the offer documents.
Answer 7(b)(ii)
Issue opening date : It means that the issue must open within 3 months from the
date of issuance of the observation letter by SEBI, if any, or within 3 months from 22nd
day from the date of filing of draft offer document with SEBI, if no observation letter is
issued. For a fast track issue or self prospectus this requirement is not applicable.
Answer 7(b)(iii)
Mandatory collection centre : SEBI (DIP) Guidelines, 2000 require a minimum
number of collection centers for an issue of capital to be at four metropolitan center Viz.
Mumbai, Delhi, Kolkata & Chennai. However, the issuer company is free to appoint as
may collection centers as it may deem fit in addition to minimum requirement.
Answer 7(c)
Investor Education and Protection Fund (IEPF) has been established under Section
205C of The Companies Act, 1956. The IEPF stipulate the activities related to investor
education awareness and protection for which the financial sanction can be provided
under IEPF.
Activities stipulated under IEPF Rules :
— Education Programme through media
EP–SLC –December 2008 52
— Organizing seminars and symposia
— Proposals for registration of Voluntary Associations or Institution or other
organizations engaged in Investor Education and Protection activities
— Proposals for projects for Investors’ Education and Protection including research
activities and proposals for financing such projects
— Coordinating with institutions engaged in Investor Education, awareness and
protection activities.
Question 8
(a) What do you understand by ‘fast track issues’ ? Explain in brief the provisions
related to fast track issues. (6 marks)
(b) Write short notes on the following :
(i) Foreign currency convertible bonds (FCCBs)
(ii) Overseas depository bank
(iii) Prohibition of certain dealings in securities under the SEBI Regulations.
(3 marks each)
(c) What are the requirements for making investment in Indian Depository Receipts
(IDRs) ? (5 marks)
Answer 8(a)
SEBI has decided to enable listed companies satisfying certain specified requirement
to make fast track issue. Such companies are not required to file draft offer document
with SEBI and stock exchange. Accordingly, the provisions relating to filing of offer
documents are not applicable to public issue of securities by a listed issuer company or
a rights issue of securities by a listed issuer company where the aggregate value of
such securities including premium if any exceed Rs.50 lacs if the condition are satisfied.
Accordingly the provisions relating to filing of offer document are not applicable to
public issue of securities by a listed issuer company or a rights issue of securities by a
listed issuer company, where the aggregate value of such securities, including premium,
if any, exceeds Rs. 50 lacs, if the following conditions are satisfied :
(i) The shares of the company have been listed on any stock exchange having
nationwide terminals for a period of at least three years immediately preceding
the reference date.
(ii) The average market capitalization of public shareholding’ of the company is at
least Rs.10,000 crores for a period of one year.
(iii) The annualized trading turnover of the shares of the company during six calendar
months immediately preceding the month of the reference date has been at
least two per cent of the weighted average number of shares listed during the
said six months period.
(iv) The company has redressed at least 95% of the total shareholder/investor
grievances or complaints.
(v) The company has complied with the listing agreement for a period of at least
three years immediately preceding the reference date.
 53 EP–SLC – December 2008
(vi) The impact of auditors’ qualifications if any on the audited accounts of the
company in respect of the financial years for which such accounts are disclosed
in the offer document does not exceed 5% of the net profit/loss after tax of the
company for the respective years.
(vii) No prosecution proceedings or show cause notices issued by the Board.
(viii) The entire shareholding of the promoter group is held in dematerialized form as
on the reference date.
Answer 8(b)(i)
Foreign Currency Convertible Bonds (FCCBs) means bonds issued in accordance
with the FCCB and Ordinary Shares (Through Depository Receipt Mechanism) Scheme,
1993 and subscribed by a non resident in foreign currency and convertible into ordinary
shares of the issuing company in any manner, either in whole or in part on the basis of
any equity related warrants attached to debt instruments.
Answer 8(b)(ii)
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.
Answer 8(b)(iii)
Regulation 3 of SEBI (Prohibition of Fraudulent and Unfair Trade practices relating
to Securities Markets) Regulations prohibits certain dealings in securities and provides
that no person shall directly or indirectly :
(a) buy, sell or otherwise deal in securities in a fraudulent manner;
(b) 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 thereunder;
(c) 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;
(d) engage in any act, practice, 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 thereunder.
Answer 8(c)
Requirements for making investment in Indian Depository receipts (IDRs)
An issuing company cannot raise funds in India by issuing IDRs unless it has
obtained prior permission from SEBI at least 90 days prior to the opening date of the
issue in the notified manner along with a non-refundable fee of US $ 10,000.
The issuing company is required to obtain the necessary approvals or exemption
EP–SLC –December 2008 54
from the appropriate authorities from the country of its incorporation and also has to
appoint an overseas custodian bank, a domestic depository and a merchant banker for
the purpose of issue of IDRs.
The issuing company has to file through a merchant banker or the domestic depository
a due diligence report with the Registrar and also with SEBI.
The issuing company, seeking permission should obtain in-principle listing permission
from one or more stock exchanges having nation wide trading terminals in India.