Copyright Reserved Serial No Institute of Certified Management Accountants of Sri Lanka Managerial Level November 2014 Examination Examination Date : 16 th November 2014 Number of Pages : 07 Examination Time: 9.00 a:m. 1.00 p:m. Number of Questions: 10 Instructions to Candidates 1. Time allowed is four (4) hours. 2. Total: 200 Marks. 3. Answer any four (4) questions in Section A, all questions in Part I and any three (3) questions from Part II in Section B. 4. Section A: Corporate Law and Section B: Advanced Taxation 5. The answers should be in English Language. Subject Subject Code Corporate Law & Advanced Taxation (CLT / ML 4-304) SECTION A: Corporate Law Answer any four (4) questions Question No. 01 (25 Marks) Sunil and Nimal wish to form an organization to run a business which has the following attributes: the assets belong to the organization, it can create a floating charge over its assets, change in membership does not alter its existence, and members cannot transfer their interests to others. They also desire to keep control over the business within a limited circle and maintain the privacy of their business. Advise them the best legal structure for their business explaining the special benefits arising from such type of business organization and summarizing the steps necessary to form the organization. Question No. 02 (25 Marks) Explain the meaning of disqualification of directors under the provisions of Companies Act No.7 of 2007 and list out the grounds on which the shareholders can apply to the courts to have a person banned from being appointed or holding office as a director of a company. (12 Marks) Explain the followings: (i) Shareholder Resolution in lieu of meetings (08 Marks) Institute of Certified Management Accountants of Sri Lanka 1
Question No. 03 (25 Marks) Analyze and explain the importance of the provisions of the Companies Act No. 7 of 2007 on capacity of the company to make contracts. (18 Marks) Explain the meaning of minority buyout rights. (07 Marks) Question No. 04 (25 Marks) Sabrina, the company secretary of Home World Plc was involved in all marketing and media communications for the company. When she was in preparation for releasing the latest quarterly reports, Sabrina learned that an unanticipated and dramatic loss for the company is inevitable. Before the information was made public, Sabrina sold all of her shares in Home World Plc the next day. The sales were very timely because the price of Home World Plc shares was still high at the time. Thereby she avoided a large loss when the share price dropped upon public disclosure of the results. Discuss the liability of Sabrina. (10 Marks) Tilak is a minority shareholder of Edmonton Ltd. He complains that the directors have sold company assets and have used the proceeds from the sale to purchase an apartment in their own names. He also tells that the directors are the controlling shareholders of the company and they have ratified their own acts at a recent general meeting. Advice Tilak, who wishes to initiate an action against the directors with reference to the relevant statutory provisions? (15 Marks) Question No. 05 (25 Marks) Discuss the legal implications on the following scenarios. (c) Suresh a Director of Alberta Ltd. is responsible for its marketing strategy and he takes a number of decisions without consulting his fellow directors. It is revealed that his decisions are wrong and have resulted in a loss of profits. When Suresh s actions are questioned by the Board of Alberta Ltd., he argues that he rarely attends board meetings, and hence it was the lack of information that led to his erroneous decisions. (12 Marks) Laura and her husband Mike are the directors of Ran Garments Ltd. It has a subsidiary, Home Loan Ltd. which offers financial services to home buyers. Laura and Mike wishes to obtain a loan from the Home Loan Ltd to enable them to purchase a holiday home. (07 Marks) Ranil and Bimal the directors of Cason Ltd, knowing that the company is in financial difficulty and is unable to pay its debts as and when they fall due decided to continue to carry on its business which resulted in liquidation of the company. A liquidator is appointed and claims Ranil and Bimal as directors of Cason Ltd are liable for the failure of the company. (06 Marks) End of Section A Institute of Certified Management Accountants of Sri Lanka 2
SECTION B: Advanced Taxation Part I Answer all questions Question No. 06 (40 Marks) BNS Shoes (Private) Limited, a company incorporated on 01 st April, 2007 in Sri Lanka is engaged in manufacturing of shoes. The information and relevant notes for the year of assessment 2012/2013 is given below. Note 01 The net profit before tax of the company for the year of assessment (after deducting all the expenses and crediting all the income) is 83,512,500/-. Note 02: Property, Plant and Equipment Cost Balance as at 01/04/2012 Additions (Disposals) Balance as at 31/03/2013 Rs Land 112,500,000 750,000-113,250,000 Building 202,500,000 - - 202,500,000 Motor car 9,750,000 - - 9,750,000 Furniture & fittings 1,575,000 397,500-1,972,500 Office equipment 1,463,325-185,250 1,278,075 Plant & Machinery 36,851,970 - - 36,851,970 Computer & accessories 186,750 - - 186,750 364,827,045 1,147,500 185,250 365,789,295 Accumulated Depreciation Land - - - - Building 20,250,000 10,125,000-30,375,000 Motor car 975,000 1,950,000-2,925,000 Furniture & fittings 630,000 394,500-1,024,500 Office equipment 731,663 319,518 92,625 958,556 Plant & Machinery 14,740,788 7,370,394-22,111,182 Computer & accessories 93,375 46,688-140,063 37,420,826 20,206,100 92,625 57,534,301 Unless stated otherwise all items of Property, Plant and Equipment were either constructed or acquired on 01 st April 2007. One of the machinery with a cost of 955,000/- was acquired under a five year lease agreement on 01 st September 2011. Monthly installment (including interest, excluding VAT) is 227,400/-. Company has settled ten monthly installments during the year of assessment. Note 03 Other income included in the net profit consists of the following. Net interest income (deducted 10% withholding tax) 270,000/-. Dividend income (deducted 10% withholding tax) 1,113,750/-. Profit on disposal of office equipment is 19,875/- (Sales proceed is 112,500/-). Institute of Certified Management Accountants of Sri Lanka 3
Note 04 Following expenses also have been deducted in arriving at the net profit. Depreciation (Note 2) 20,206,100 Salaries and wages 6,892,500 Directors emoluments 2,625,000 Lease interest 648,900 Interest on bank overdraft 65,175 Donations (Note 5) 262,500 Legal fee (Note 6) 90,000 Foreign travel (Note 7) 180,000 Professional charges (Note 8) 18,750 Management fee 4,500,000 Provision for gratuity (Note 9) 333,000 Fines 108,000 Ground rent 195,000 Entertainment expenses 522,000 Auditors remuneration 337,500 Stamp duty (Note 10) 16,000 Note 05: Donations (Made in cash) To a Government University 150,000 To Tower hall Theater Foundation 75,000 To a Temple 37,500 262,500 Note 06: Legal fee On labour tribunal hearings 82,500 On acquisition of land 7,500 90,000 Note 07: Foreign travelling Incurred on Directors travelling to participate business conference in Japan. Note 08: Professional charges Paid to company secretaries for filing annual return 1,500 Paid to tax consultant for submitting an appeal with Inland Revenue 2,250 (Related to year of assessment 2011/2012) Paid to Inland Revenue to settle the assessment charges (meaning / penalty) 15,000 18,750 Note 09: Provision for gratuity Balance as at 01/04/2012 892,500 Provision for the year 333,000 Payment made during the year (225,500) Balance as at 31/03/2013 1,000,000 Note 10: Stamp duty Stamp duty paid on the execution of an agreement with the bank to obtain a loan for working capital requirements. Note 11 Revenue of the company for this year of assessment was 243,932,500/-. The adjusted business profit of the company for the year of assessment 2011/2012 was 987,450/-. Note 12 Company has paid taxes amounting to 5,000,000/- under self- assessment during the year of assessment 2012/2013. Institute of Certified Management Accountants of Sri Lanka 4
Note 13: Dividend distribution The company has distributed dividend of 1,500,000/- in the month of September 2012 out of the profits earned during the year of assessment 2011/2012. The distributable profit for the year of assessment 2011/2012 was 35,000,000/-. Company has not distributed any other dividend for the year of assessment 2012/2013. You are required to compute the Balance Income Tax Payable / Refund Due for the year of assessment 2012/2013. (Total 40 Marks) End of Part I Part II Answer any three (3) questions Question No. 07 (20 Marks) Identify the sources of income liable for income tax and compute the income liable for tax for the year of assessment 2012/2013. If any income is exempt from tax, it must be stated clearly. (i) Mr. Kapugoda has two houses and in the Y/A 2010/2011, he has converted one of his houses into three residential units. The local authority has assessed rating assessment separately for each unit. Rates are paid at 30%. Unit no. Floor area (Sq. Ft.) Gross rent per month () Rating assessment () 1 2,500 65,000 320,000 2 700 15,000 95,000 3 1,950 35,000 125,000 The other house has a rating assessment of 220,000/- and rates paid at 30%. He uses that house for as his residence. Mr. Danture, the Finance Manager of K.D.L. Tractors (Pvt) Ltd, received following receipts during the Y/A 2012/2013 from his employment. Compute his income from employment for income tax purposes. Monthly Salary 135,000 Bonus 420,000 Leave pay 15,000 Monthly Entertainment Allowance 25,000 (But he utilized 225,000/- only) Telephone bill reimbursement 18,000 EPF contribution by the employer 225,600 Employer has provided Mr. Danture a car (over 1500cc) for his private travelling and bears fuel cost. Institute of Certified Management Accountants of Sri Lanka 5
Mr. Rathnasiri Fernando has retired from his employment on 30 th September 2012. He had 30 year service at the date of the retirement. He received the following at his retirement. Gratuity EPF Own contribution 1,200,000 Employer s contribution 1,800,000 ETF 450,000 9,750,000 (Average monthly salary for last three years 250,000) Investment income EPF 140,000 (15,000 from investment made before 01/04/1987) ETF 85,000 (23,000 received from investment made before 01/04/1987) You are required to compute Mr. Rathnasiri Fernando s income liable on retirement benefit for the year of assessment 2012/2013 (taxable under normal rate and concession rate separately). (10 Marks) Question No. 08 (20 Marks) What is meant by the term taxable activity under the Value Added Tax Act? (03 Marks) (c) Any person who is dissatisfied with an assessment or a penalty imposed on VAT could make an appeal to the Commissioner General of Inland Revenue. State the conditions to be satisfied for a valid appeal? (07 Marks) Sedara Machineries (Private) Limited is a company engaged in the business of importing and selling of plant and machineries. The quarterly value of supplies and the input VAT details of the business for the quarter ended 31 st March 2013 are as follows. Value of supply From agricultural machinery and parts 12,234,500 From machinery used to manufacture the ticket issuing machines 114,225,750 From milk processing machinery 222,500,350 From machinery used to manufacture furniture 12,225,950 Value of Imports (excluding tax) Agricultural machinery and parts 9,150,000 Machinery used to manufacture the ticket issuing machines 95,270,000 Milk processing machinery 150,500,000 Machinery used to manufacture furniture 7,800,000 Additional information Sedara Machineries purchased office equipment for company usage during the month of February 2013 from Asha Traders and paid 35,000/- as VAT. However, subsequently Asha Traders issued a tax credit note to Sedara in order to revise the invoice value due to a VAT overcharge of 5,500/-. Input VAT on other expenses (excluding the office equipment) 55,750/- You are required to compute the VAT liability of Sedara Machineries (Private) Limited for the quarter ended 31 st March 2013 (Specify reasons clearly as to why if any item has not been considered for the calculation of VAT). (10 Marks) Institute of Certified Management Accountants of Sri Lanka 6
Question No. 09 (20 Marks) You are the Tax Manager of MNC Associates and your assistant brought following issues for your consideration which are related to computing Economic Service Charges (ESC) and Nation Building Taxes (NBT) of different clients for the quarter ended 31 st March 2013. Economic Service Charges (i) One of the clients who is engaged in the business of manufacturing had a taxable profit of 255,000/- for the year of assessment 2011/2012. The business generated 85,500,000/- turnover for the quarter ended 31 st March 2013. A person who is carrying on a business of distributing articles generated a turnover of 68,250,000/- for the quarter ended 31 st March 2013. The business suffered a taxable loss in the preceding year of assessment. Nations Building Tax (i) A person who is engaged in the retail business earned turnover of 3,500,000/- for the quarter ended 31 st March 2013. However, the business has been showing taxable losses from its operation continuously. A local educational institution was established to provide educational services and earned turnover of 35,000,000/- for this quarter. Question No. 10 (20 Marks) ABC Limited pays its annual income tax on self- assessment basis and the preceding year tax liability was 450,000/-. At the end of the year, the income tax liability for the current year was calculated as 475,000/-. State under self- assessment basis quarterly taxes to be paid by the company to avoid penalties, with due dates. (02 Marks) If an individual fails to furnish a return on the due date the assessor has the authority to impose a penalty on that individual. (i) What is the maximum amount of penalty that could be imposed on such an individual? (02 Marks) What is the applicable time bar for a person not furnishing a return on or before the due date? (03 Marks) (iii) Under which grounds such penalty may be waived or reduced? (c) State the circumstances where an assessment issued is considered as final and conclusive as regards the amount of assessable income. (08 Marks) End of Part II End of Section B End of Question paper Institute of Certified Management Accountants of Sri Lanka 7