Institute of Certified Management Accountants of Sri Lanka. Operational Level November 2013 Examination. Business Law and Taxation (BLT / OL 4-204)

Transcription

1 Copyright Reserved Serial No Operational Level November 2013 Examination Examination Date : 30 th November 2013 Number of Pages : 06 Examination Time: 1.30 p:m p:m. Number of Questions: 07 Instructions to Candidates 1. Time allowed is three (3) hours. 2. Total: 100 Marks. 3. Answer all questions in Part I and four (4) questions from Part II selecting two (2) questions from each of the Sections, A and B. 4. Section A: Business Law and Section B: Taxation. 5. The answers should be in English Language. Subject Subject Code Business Law and Taxation (BLT / OL 4-204) PART I Question No. 01 (20 Marks) Answer all parts of the Question No.1. Select the most correct answer to each part of the question. Write the number of the part of the question and the selected answer by stating the relevant English letter, in your answer booklet. E.g. (1) (relevant English letter), (2) (relevant English letter) etc (1) Exemption clauses are used in contracts to: (a) limit liability (b) exclude liability (c) increase liability (d) limit or exclude liability (2) An Estoppel means: (a) An honest intention to abstain from taking any unfair advantage of another. (b) A remedy in the form of a writ for the enforcement of a judgment. (c) Stopped from proving something in court because of something said or done before that shows the opposite. (d) None of the above. (3) Which of the following is a way in which terminates the agency relationship by operation of law? (a) Death of the principal. (b) Insanity of either the principal or agent. (c) Bankruptcy of either the principal or agent. (d) All of the above. 1

2 (4) Which of the following is NOT a feature of bills of exchange? (a) To become the holder in due course, the holder must take the bill in good faith not knowing of the lack of title of the person from whom he/she received it and he/she has given value for it. (b) A forged signature on bills, including an endorsement is of no effect. (c) A thief may steal a bearer bill and passes it to another who will become the legal owner of it. (d) A person cannot be the legal owner of a bill if he/she receives it from a person who was not the legal owner of it. (5) What term describes the remedy by which a defendant is forced to carry out his/her obligations? (a) Coercion (b) Subrogation (c) Specific performance (d) None of the above (6) Select the correct statement relating to employment income which is the sole income of Mr. Silva in relation to the year of assessment 2011/2012. (a) He can claim interest payment made to a bank in respect of a loan taken to construct a house. (b) He cannot claim qualifying payment made to the government. (c) He can claim capital payment made to a bank in respect of a loan taken to purchase of a land to construct a house. (d) He was required to furnish an income tax return for the year of assessment 2011/2012. (7) Select the incorrect answer in the case of individuals (a) Income wherever arising is chargeable to tax, if such individual is a resident of Sri Lanka. (b) Interest received by a resident of Sri Lanka in foreign currency through a bank on a deposit made outside Sri Lanka is chargeable to tax. (c) Rent received by a non resident of Sri Lanka from a property outside Sri Lanka it is not chargeable to tax. (d) Income received from services rendered in Sri Lanka by a non-resident is chargeable to tax. (8) Select the correct statement out of the following: Return of income is to be submitted by an individual only where, (a) a notice is received. (b) a payment of tax is to be made. (c) the income is chargeable to tax. (d) he is chargeable to income tax. (9) Select the correct answer from the following: From rent income, (a) repair expenditure can be deducted. (b) rates paid can be deducted if it is not borne by the tenant. (c) repair expenditure is restricted to 25% of the gross rent. (d) rates and repair expenditure are deductible without any restriction. (10) Select the correct answer out of the following: In the case of a partnership, (a) income tax is not payable by the partnership. (b) partnership tax is payable on the divisible profits and other income if the divisible profit is more than Rs.600,000/-. (c) partnership tax is calculated on the amount arrived at after deducting Rs.600,000/- from the divisible profits and other income. (d) no estimated assessment can be issued on the partnership even if the return is not submitted by the partnership. (10 2 Marks = Total 20 Marks) End of Part I 2

3 PART II Section A: Business Law Answer any two (2) questions Question No. 02 (20 Marks) Explain the legal issues that have arisen in the following situations: (a) On 15 th August, Amal offers to sell his antique clock to Nimal for Rs.500,000/-. Nimal subsequently inspects the clock and says to Amal 'The clock is in excellent condition and I'd like to have it. There's no doubt that I could afford to buy this clock if I could pay for it in three installments. Nothing further is said concerning the clock. On 18 th August, Nimal sends a letter to Amal in which he accepts Amal's offer. On 19 th August, Nimal learns that Amal has sold the clock to Richard for Rs.600,000/-. On 20 th August Amal receives Nimal's letter of acceptance. (12 Marks) (b) Mala and Piyal were engaged to be married. Among other arrangements Mala suggested that after the marriage she should be paid a shopping allowance of Rs.2,500/- a month. This was agreed by Piyal. After the marriage he paid the allowance for a while but later the payment of the allowance fell into arrears. Mala claimed that this arrangement created a binding contract and sued for breach of contract. (08 Marks) Question No. 03 (20 Marks) (a) David offered to sell Sega 24,000 imported glasses but by mistake misquoted the price as Rs.100/- per dozen instead per glass. Sega accepted the offer, taking advantage of David s mistake, although as a trader in the business of household items, he knew that the price was to be per glass according to the ordinary trade usage. Now Sega wishes to enforce the contract against David. What is the effect of non performance of the contract by David? Explain. (08 Marks) (b) Describe the followings: (i) Existing goods. (ii) Future goods. (iii) Contingent goods. (3 04 Marks = 12 Marks) Question No. 04 (20 Marks) Briefly explain what types of intellectual property are protected by the Intellectual Property Law. End of Section A 3

4 Section B: Taxation Answer any two (2) questions Question No. 05 (20 Marks) Employment Income Mr. Kapila Bandara is an employee of a Mercantile Firm working as an executive officer. During the year of assessment 2011/2012, he has received the following payments as well as non cash benefits from the employer. Gross Salary is Rs.175,000/- per month. Vehicle was provided with a driver and fuel. Engine capacity of that vehicle is 1800cc. He has been provided a residence which is not owned by the firm. Therefore, Rs. 40,000/- has been paid to the owner. However, it has been provided to Mr. Bandara rent free. Rating assessment of the residence is Rs.300,000/- and the rates payable are at 20% of the rating assessment. Total amount of telephone bills have been reimbursed by the firm, and it is Rs.64,000/-. He was paid a one month bonus out of the profits of the year of assessment 2010/2011. Rs.75,000/- was paid by the insurance company as medical reimbursements on OPD treatment. Interest income Mr. Bandara has made investments in banks as well as in government securities. It appears that withholding tax has been deducted at the rate of 2.5% on all interest from all the banks based on the declaration tendered by him. Total of such interest is Rs.354,000/-. Interest paid to him on a treasury bill was Rs.60,000/-. Dividend Income Mr. Bandara has received dividends amounting to Rs.48,000/- after deduction of withholding tax. Dividend received from a unit trust is Rs.18,000/-. Income from properties Mr. Bandara has rented out his own residence to a foreigner who is a resident representative of a foreign airline. It was given only for 11 months and rent has been recovered. The rent received per month is Rs.60,000/- and the house has been assessed by the local authority for Rs.300,000/- on which rates are payable at 20%. This house was constructed by him and the construction was completed during the year of assessment 2006/2007. It has a floor area of 1,600 sq. ft. Other income He has sold a land for Rs.1,800,000/- for which he has paid Rs.800,000/- at the time of purchase in 2004, and he has never sold any immoveable property. PAYE deductions - Rs.212,400/-. Employer has contributed 12% of the salary to an approved provident fund and his contribution of 8% is deducted from his salary. Payments Interest and capital payment made to the bank on a loan obtained for the construction of his house is Rs.158,000/- and Rs.79,000/- respectively. Donation made to Sri Dhamma Viharaya is Rs.25,000/-. You are required to compute his total statutory income, income tax liability, tax credits and balance tax payable for the year of assessment 2011/

5 Question No. 06 (20 Marks) (a) (i) Income tax could minimize the disparity between the rich and the poor. Describe the above statement with the principles of taxation. (ii) Everybody is paying taxes knowingly or unknowingly. Explain this statement. (06 Marks) (b) State whether the following statements are true or false. Justify your answers with relevant statutory provisions related to Value Added Tax. (i) Input tax can only be claimed on a tax invoice / CUSDECS. (ii) Input tax is disallowed if it is related to exclude supply. (iii) Output tax rate is zero, if it is related to exempt supply. (iv) A suspended tax invoice can be issued by any VAT registered person. (4 2 Marks = 08 Marks) (c) Tharindu Motors (Pvt) Ltd. is importing motor vehicles and the company has incurred Rs.458,000/- as foreign travel expenditure during the year of assessment 2011/2012. The statutory income from trade for the previous year of assessment is Rs.2,580,000/-. Compute the disallowable amount, if any, in ascertaining the profit and income of Tharindu Motors (Pvt) Ltd. Give reasons. (06 Marks) Question No. 07 (20 Marks) Pasindu Enterprise is a partnership which is engaged in manufacturing of rubber product for exports. Wijayathilaka and Karunathilaka are the partners of the partnership and their profits sharing ratio is 1:1. Turnover of the partnership is Rs.543,000,000/-. The profit and loss account for 2011/2012 shows that the net profit of the partnership is Rs.27,864,000/-, and it has been arrived after deducting all expenses including the following expenses. Salaries to partners are equally paid - Rs. 3,800,000 Non-cash benefits to partners equally - Rs. 1,200,000 Interest paid to partners equally paid - Rs. 1,500,000 Partnership has purchased two motor Lorries during this year of assessment. One was purchased in the month of May 2011 and other was purchased in the month of December. Costs of acquisition of the Lorries are Rs.4,300,000/- and Rs.5,400,000/- respectively. Book depreciation is claimed as per the business policy, and it is 25%. Depreciation is allowed for the full year irrespective of the date of purchase. The old lorry which was purchased in 2004 for Rs.2,800,000 was sold for Rs.1,900,000 in August Rs.40,000/- worth of materials have been donated at the annual alms giving to Parama Damma Viharaya which is an approved charity. Legal cost incurred in relation to partition case of a business premises is Rs.242,000/-. 5

6 Audit fees is Rs.300,000/-, and it includes Rs.50,000/- paid to a tax consultant in respect of an opinion sought on NBT liability. All other expenses are allowed for tax purposes. The Partnership does not have any other source of income. The Partnership does not enjoy any tax holiday. No NBT is payable by the partnership. You are required to compute the following with regard to the year of assessment 2011/2012. (a) the divisible profit of the partnership. (b) partnership tax payable. (c) partnership tax credit and ESC credit available to the partners. End of Section B End of Part II End of Question Paper 6