Mock Test Paper - Series I: March, 2025

Date of Paper: 17 th March, 2025

Time of Paper: 2 P.M. to 5 P.M.

FINAL COURSE: GROUP – II

PAPER – 4: DIRECT TAX LAWS & INTERNATIONAL TAXATION
Division A – Multiple Choice Questions
Answer Keys
MCQ Answer
No.
1. (c) ` 10,000 and ` 1,56,000, respectively
2. (b) Kishor and Bablu
3. (d) ` 1,02,000
4. (c) ` 8,61,507
5. (c) (i) and (iii)
6. (a) ` 1,16,25,000
7. (d) Either (b) or (c)
8. (c) Interest of ` 15,40,313 has to be added to its total income for
P.Y.2026-27
9. (d) Since X has not reported the transaction as an international
transaction, X will be considered to have misreported its
income and penalty will be 200% of the amount of tax payable
on the misreported income
10. (d) Equalization levy of ` 33,000 is deductible by Smile Ltd. and
penalty of ` 33,000 is attracted for non-deduction
11. (b) ` 42,000. However, the said amount would not be subject to
any tax.
12. (c) Either (a) or (b)
13. (b) No, deduction would not be allowed as such expenditure is of
capital nature
14. (d) No; registration cannot be cancelled, and the value of benefit
provided to Mr. Ranbir would be deemed as income of the trust.
15. (c) ` 1,14,33,010

1
 Division B – Descriptive Choice Questions
1. Computation of Total Income of Narmada Ltd. for the A.Y.2025-26
Particulars Amount (`)
Profits and Gains from Business and Profession
Net profit as per profit and loss account 3,50,00,000
Add: Items debited but to be considered separately or to
be disallowed
Fees paid to directors without deducting tax at source 30,000
[Disallowance@30% would be attracted under section
40(a)(ia) for non-deduction of tax at source from director’s
remuneration on which tax is deductible under section 194J]
Depreciation provided on straight line basis 50,00,000
[Depreciation provided in the accounts on straight line basis
(i.e., ` 50 lakhs) has to be added back]
Contribution to a National Laboratory Nil
[Contribution to a National Laboratory under section 35(2AA)
qualifies for deduction@100%].
GST liability 2,10,000
[GST liability of ` 2.10 lakhs would attract disallowance under
section 43B, since it was paid only on 27.12.2025 (i.e., after
the due date of filing return of income of A.Y.2025-26). It
would be allowed in the year of payment (i.e., P.Y.2025-26).
Hence, it has to be added back for computing business
income]
Disallowance under section 40A(2) for excess payment to 5,00,000
related person
[Saraswati Ltd. is a related person under section 40A(2),
since the directors of Narmada Ltd. have substantial interest
in Saraswati Ltd. Therefore, excess payment of ` 5 lakh to
Saraswati Ltd. for purchase of goods would attract
disallowance under section 40A(2).]
Disallowance under section 40A(3) for payment 5,00,000
exceeding ` 10,000 made in cash for purchases and
expenditure
[Cash payments exceeding ` 10,000 a day attracts
disallowance under section 40A(3). Accordingly, cash
payment of ` 5 lakhs made on 17-8-2024 would attract

2
disallowance under section 40A(3), even if such payment is
made due to demand of supplier]
Disallowance under section 40A(3) for cash payment 92,000
exceeding `35,000 in a day to transport operators for
hiring of lorry
[In respect of cash payments to transport operators, a higher
limit of ` 35,000 per day is permissible. Therefore, cash
payment of ` 35,000 on 03-07-2024 would not attract
disallowance under section 40A(3). However, cash payments
of ` 40,000 and ` 52,000 on 06-06-2024 and 15-01-2025,
respectively, would attract disallowance under section 40A(3)
since the same exceeds ` 35,000 per day]
Legal expenses for issue of bonus shares -
[There is no fresh inflow of funds or increase in capital
employed on account of issue of bonus shares and there is
only reallocation of the company’s fund. Consequently, since
there is no increase in the capital base of the company, legal
expenses of ` 5 lakhs in connection with issue of bonus
shares is revenue expenditure and is hence, allowable as
deduction. It has been so held by Apex Court in case of CIT
vs. General Insurance Corpn. (2006) 286 ITR 232.
Legal expenses for issue of right shares 4,00,000
` 4 lakhs, being legal expenses in relation to issue of rights
shares results in expansion of the capital base of the
company and is, hence, a capital expenditure. Therefore, the
same is not allowable as deduction. It has been so held in
Brooke Bond India Ltd. v. CIT (1997) 225 ITR 798 (SC)]
Donation to a registered political party 17,00,000
[Donation paid to a political party is not an allowable
expenditure under section 37 since it is not laid out wholly or
exclusively for the purposes of business or profession.
Hence, the same has to be added back while computing
business income.

3
Bad debt written off earlier, recovered now 2,00,000 86,32,000
[The amount of bad debt written off earlier when recovered
subsequently, such recovery is taxable under section 41(4)]
4,36,32,000
Less: Items credited but to be considered separately or
to be allowed/ Expenditure to be allowed
Depreciation allowable under the Income-tax Act, 1961 62,00,000
[Depreciation calculated as per Income-tax Rules, 1962 (i.e.
` 62 lakhs) is allowable as deduction under section 32]
Over-valuation of stock [` 55 lakhs x 10/110] 5,00,000
[The amount by which stock is over-valued has to be reduced
for computing business income. ` 50 lakhs, being the
difference between closing and opening stock, has to be
adjusted to remove the effect of over-valuation]
67,00,000
Gross Total Income 3,69,32,000
Less: Deduction under Chapter VI-A
Donation to registered political party [under section 17,00,000
80GGB
[Donation made by a company to a political party is allowable
deduction under section 80GGB from gross total income,
subject to the condition that payment is made otherwise than
by way of cash. Since the donation is made by cheque the
same is allowed as deduction under section 80GGB]
Total Income 3,52,32,000
Computation of tax liability of Narmada Ltd. for A.Y.2025-26
Particulars `
Tax@25% on total income of ` 3,52,32,000 88,08,000
[Since the total turnover or gross receipt in P.Y. 2022-23 ≤ 400 crore]
Add: Surcharge@7% (since total income exceeds ` 1 crore but does
not exceed ` 10 crores) 6,16,560
Tax payable including surcharge 94,24,560
Add: Health and Education cess@4% 3,76,982
Total tax payable 98,01,542
Tax payable (Rounded off) 98,01,540

4
2 (a) Computation of total income of PNG LLP

Particulars ` (in lacs)

Profit from Unit A [` 502 lakhs + ` 24 lakhs, being 526
disallowance u/s 43B]
Profit from Unit B [` 753 lacs + ` 47 lacs, being disallowance 800
u/s 40A(3)]
1326
Less: Deduction under section 10AA [See Working Note 174
below]
Total Income 1152
Tax on total income@30% 345.60
Add: Surcharge@12%, since total income > `1 crore 41.47
387.07
Add: Health and Education cess @4% 15.48
Tax liability (as per normal provisions) 402.55
Computation of Adjusted total income and Alternate Minimum tax of
PNG LLP as per the provisions of section 115JC for A.Y. 2025-26
Particulars ` (in lakh)
Total income as per the normal provisions 1152
Add: Exemption under section 10AA 174
Adjusted Total Income 1326
Tax@18.5% of Adjusted Total Income 254.31
Add: Surcharge @12% as the adjusted total 29.44
income is > `1 crore
274.75
Add: Health and Education cess @4% 10.99
Alternate Minimum Tax as per section 115JC 285.74
Since the tax payable as per the normal provisions of the Act is more than the
alternate minimum tax payable, the total income as per normal provisions shall
be liable to tax and the tax payable for A.Y. 2025-26 shall be `402.55 lakhs.

5
Working Note:
Computation of deduction under section 10AA in respect of Unit A located
in a SEZ
Particulars ` (in lacs)
Total turnover of Unit A = 1200
(` 1200 lacs + ` 200 lacs) – ` 200 lacs, being freight and
insurance included therein. Since freight and insurance has
been excluded from export turnover, the same has to be
excluded from total turnover also
Export Turnover of Unit A
Export sale proceeds received in India 1040
Less: Insurance and freight not includible in export turnover 140
900
Profit “derived from” Unit A
Net profit for the year 502

Add: Disallowance under section 43B 24

526
Less: Items of business income which are in the nature of
ancillary profits and hence, do not constitute profit
‘derived from’ business for the purpose of exemption
under section 10AA
Duty drawback 38
Profit on sale of import entitlement 24
62
464
Deduction under section 10AA (6th year of operations)
Export turnover
of Unit A
Profit derived x -----------------------x 50%
from Unit A
Total turnover
of Unit A
= 50% of 464 х 900/1200 = 174

6
 (b) Computation of total income of Lokesh for A.Y. 2025-26 as per section
115BAC
Since Mr. Lokesh is a resident in India for the P.Y.2024-25, his global income
would be subject to tax in India. Therefore, income earned by him in Country A
would be taxable in India.
Particulars Amount (`) Amount (`)
Salaries
Salary from Platinum Ltd. 23,00,000
Less: Standard deduction u/s 16(ia) 75,000 22,25,000
Income from house property
Let out property in Country A
Gross Annual Value1 USD 4,500
Less: Municipal taxes USD 450
Net Annual Value USD 4,050
Less: Deduction under section 24 – 30% of USD 1,215
NAV
USD 2,835
[$ 2,835 x 71, being the last day of previous 2,01,285
year i.e., 31.3.2025 as per Rule 115]
Self-occupied property in India
Loss from self-occupied property [Interest u/s
24(b) is not allowable in respect of self-
occupied property under section 115BAC] -
2,01,285
Profits and gains from business or
profession
Income from business in Country A 17,75,000
[$ 25,000 x 71, being the last day of previous
year i.e., 31.3.2025 as per Rule 115]
Capital Gains
Short term capital gains on sale of shares of 3,50,000
companies registered in Country A
[$ 5,000 x 70, being the last day of the month
immediately preceding the month in which the

1Rental Income has been taken as GAV in the absence of other information relating to fair
rent, municipal value etc.

7
shares are transferred i.e., 28.2.2025 as per
Rule 115]
Income from Other Sources
Interest on bank fixed deposits 1,60,000
Dividend from shares held in Country A 7,00,000
[$ 10,000 x 70, being the last day of the month
immediately preceding the month in which the
dividend is declared i.e., 28.2.2025 as per Rule
115]
8,60,000
Gross Total Income/Total Income 54,11,285
Total Income (Rounded off) 54,11,290
Computation of Net tax liability of Lokesh for A.Y.2025-26
Particulars Amount
Upto ` 3,00,000 Nil
` 3,00,001 – ` 7,00,000 [i.e., ` 4,00,000 @5%] 20,000
` 7,00,001– ` 10,00,000 [i.e., ` 3,00,000 @10%] 30,000
` 10,00,001– ` 12,00,000 [i.e., ` 2,00,000 30,000
@15%]
` 12,00,001– ` 15,00,000 [i.e., ` 3,00,000 @ 60,000
20%]
` 15,00,001– ` 54,11,290 [i.e., ` 39,11,290 @ 11,73,387
30%]
13,13,387
Add: Surcharge@10% [Since total income exceed ` 50 lakhs but
does not exceed ` 1 crore) 1,31,339
14,44,726
Add: Health & Education Cess@4% 57,789
15,02,515
Less: Foreign tax credit, being lower of -
- Tax payable in India @27.767% on 8,40,309
` 30,26,285, being income from house
property of ` 2,01,285, business income
of
` 17,75,000 plus capital gains of
` 3,50,000 plus dividend income of

8
 ` 7,00,000 [i.e ` 15,02,515/ ` 54,11,290
x 100] = 27.767%
- Tax paid in Country A@20% 6,40,800
[$ 44,500 @20% x ` 72, being the rate on
30.4.2024, being the last day of the month
immediately preceding the month in which
tax is paid, i.e., May 2025]
6,40,800
Net tax liability 8,61,715
Net tax liability (Rounded off) 8,61,720

3. (a) As per section 115TD, the accreted income of “Feed the people”, a charitable
trust, registered under section 12AA which merged with an entity not entitled for
registration under section 12AB or approval under section 10(23C), would be
chargeable to tax at maximum marginal rate @ 34.944% [30% plus surcharge
@12% plus cess@4%].
Computation of accreted income and tax liability in the hands of the trust
arising as a result of merger with the “not eligible” entity for A.Y. 2025-26
Particulars Amount (`)
Aggregate FMV of total assets as on 1.4.2024, being the 1,21,00,000
specified date (date of merger) [See Working Note 1]
Less: Total liability computed in accordance with the
prescribed method of valuation [See Working 96,00,000
Note 2]
Accreted Income 25,00,000
Tax Liability @ 34.944% of ` 25,00,000 8,73,600
Working Notes:
(1) Aggregate fair market value of total assets on
the date of merger
- Land, being an immovable property 17,00,000
[The fair market value of land would be higher of `
17 lakhs i.e., price that the land would ordinarily
fetch if sold in the open market and ` 15 lakhs,
being stamp duty value as on the specified date]
- Quoted equity shares in Ink Ltd. [75,000 x ` 80 60,00,000
per share]

9
 [` 80 per share, being the average of the lowest
(` 75) and highest price (` 85) of such shares on
the date of merger]
- 55,000 preference shares of N Ltd.
[The fair market value which it would fetch if sold in
the open market on the date of merger i.e., FMV on 44,00,000
1.4.2024]
1,21,00,000
(2) Total liability
- Outside liabilities 90,00,000
- Corpus Fund of ` 15 lakhs [not includible] -
- Provision for taxation ` 5 lakhs [not includible] -
- Liabilities in respect of payment of various utility
bills [since this liability is an ascertained liability] 6,00,000
96,00,000

(b) Computation of total income of FASHION Inc., a notified FII, for A.Y.2025-26
Particulars ` `
Dividend income 7,15,000
Interest on securities [No deduction is allowable in
respect of expenses incurred in respect thereof] 16,72,000 23,87,000
Long-term capital gains on sale of bonds of
January Ltd.
Sale consideration 58,00,000
Less: Cost of acquisition 33,00,000 15,00,000
[Benefit of indexation is not allowable]
Short-term capital gains on sale of STT paid
equity shares of Exe Ltd.
Sale consideration 14,50,000
Less: Cost of acquisition 9,90,000 4,60,000
Short-term capital gains on sale of unlisted
equity shares of May Ltd.
Sale consideration 7,90,000
Less: Cost of acquisition 3,22,000 4,68,000
Total Income 48,15,000

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 Computation of tax liability of FASHION Inc. for A.Y.2025-26
Particulars `
Tax@20% on interest on securities and dividend = 20% x 4,77,400
` 23,87,000
Tax@10% on long-term capital gains on sale of bonds of January 1,50,000
Ltd. = 10% x ` 15,00,000
Tax @ 20% on short-term capital gains on sale of listed equity
shares of Exe Ltd., in respect of which STT has been paid = 20% 92,000
of ` 4,60,000
Tax @ 30% on short-term capital gains on sale of unlisted equity
shares of May Ltd. = 30% of ` 4,68,000 1,40,400
8,59,800
Add: HEC@4% 34,392
Tax liability 8,94,192
Tax liability (rounded off) 8,94,190

4. (a) (i) Since the consideration for transfer of house property at Chennai exceeds
` 50 lakhs, Mr. Anuj, being the transferee, is required to deduct tax @1% under
section 194-IA on ` 85 lakhs, being the amount of consideration for transfer of
property.
Mr. Anuj is required to deduct tax as source @1% under section 194-IA
from the amount of ` 54 lakhs, being the higher of the stamp duty value of
` 54 lakhs and consideration of ` 49,00,000 paid to Mr. Anant for transfer
of urban plot, since the stamp duty value exceeds ` 50 lakhs.
Mr. Anuj is not required to deduct tax at source under section 194-IA from
the consideration of `55 lakhs paid to Mr. Digvijay for transfer of rural
agricultural land, since the same is specifically excluded from the scope of
immovable property for the purpose of tax deduction under section 194-IA.
(ii) As per section 194LB, tax would be deductible @ 5% on gross interest
paid/credited by a notified infrastructure debt fund, eligible for exemption
under section 10(47), to a non-resident not being a company or to a foreign
company.
In the first case, since the payment is to a foreign company, health and
education cess @4% has to be added to the applicable rate of TDS.
Therefore, the tax deductible under section 194LB would be `31,200 (i.e.,
5.20% of `6 lakhs).

11
 However, in case the notified infrastructure debt fund pays interest to a
person who is a resident of a notified jurisdictional area, section 94A will
apply. Accordingly, tax would be deductible @30% (plus health and
education cess@4%) under section 94A, even though section 194LB
provides for deduction of tax at a concessional rate of 5%. Therefore, the
tax deductible in respect of payment of ` 2.5 lakh to Mr. Aman, who is a
resident of a notified jurisdictional area, would be ` 78,000, being 31.2%
of ` 2,50,000.
(iii) The landing and parking charges which are fixed by the Airports Authority
of India are not merely for the "use of the land". These charges are also for
services and facilities offered in connection with the aircraft operation at
the airport which include providing of air traffic services, ground safety
services, aeronautical communication facilities, installation and
maintenance of navigational aids and meteorological services at the airport
[Japan Airlines Co. Ltd. v. CIT / CIT v. Singapore Airlines Ltd. (2015) 377
ITR 372 (SC)]. Thus, tax is not deductible under section 194I which
provides deduction of tax for payment in the nature of rent.
Hence, tax is deductible @2% under section 194C by the airline company,
Vikasa Ltd., on payment of `18 lakhs made towards landing and parking
charges to the Airports Authority of India for the previous year 2024-25.
(iv) As per section 192, tax is deductible at source by any person who is
responsible for paying any income chargeable under the head ‘Salaries’.
However, as per sub-section (2A) of said section, the employee will be
entitled to relief u/s 89 and consequently, he will be required to furnish to
the person responsible for making the payment, such particulars in the
prescribed form (i.e., Form No.10E). The person responsible for making
the payment shall compute the relief and take into account the same while
deducting tax at source from salary.
(b) Rollback year means any previous year, falling within the period not exceeding
four previous years, preceding the first of the five consecutive previous years for
which advance pricing agreement is valid.
The application for advance pricing agreement may be filed at any time before the
first day of the previous year relevant to the first assessment year for which the
application is made, in respect of transactions which are of a continuing nature
from dealings that are already occurring; or before undertaking the transaction in
respect of remaining transactions.

12
 In the present case, since ASHA (P) Ltd. has made an application of APA and
also opted for rollback provisions, the APA is apparently in respect of international
transactions which are of continuing nature. Accordingly, the APA application filed
on 15 th February 2024 would be in respect of five previous years beginning with
P.Y. 2024-25 relevant to the A.Y. 2025-26.
Consequently, APA entered by ASHA (P) Ltd. can provide for determining ALP in
relation to international transactions entered during rollback years i.e., from A.Y.
2021-22 to A.Y. 2024-25 subject to satisfaction of certain conditions.
In the present case, since A.Y. 20219-20 and A.Y. 2020-21 fall beyond the said
four-year period, ASHA (P) Ltd. cannot avail roll back benefit in respect of these
years. From A.Y. 2021-22 to A.Y. 2024-25, the applicability of rollback provisions
would be as follows:
Rollback year Applicability of rollback provisions
A.Y. 2021-22 Yes, rollback provisions are applicable for A.Y.
2021-22.
A.Y. 2022-23 Yes, rollback provisions are applicable for A.Y.
2022-23 even if ALP adjustment was reduced to addition of
` 300 lakhs as against addition of ` 500 lakhs originally
determined by the TPO on account of APA, since such
reduction in the amount of ALP adjustment does not result
in reducing the total income or increasing the total loss, as
declared in the return of income of the said year by ASHA
(P) Ltd.
A.Y. 2023-24 Yes, roll back provisions are applicable for
A.Y. 2023-24, since ITAT has only set aside the order for
fresh consideration and the matter has not reached finality.
A.Y. 2024-25 No, rollback provisions are not applicable for
A.Y. 2024-25, since the return was filed belatedly
u/s 139(4) on 29.12.2024.

5. (a) (i) Under section 268A(1), the CBDT is empowered to issue orders, instructions
or directions to the other income-tax authorities, fixing such monetary limits, as
it may deem fit, to regulate filing of appeal or application for reference by any
income-tax authority.
Under section 268A(2), where an income-tax authority has not filed any
appeal or application for reference on any issue in the case of an assessee
for any assessment year, due to above-mentioned order/ instruction/
direction of the CBDT, such authority shall not be precluded from filing an

13
 appeal or application for reference on the same issue in the case of the
same assessee for any other assessment year or any other assessee for
the same or any other assessment year, if the tax effect exceeds the
specified monetary limits. Further, in such a case, it shall not be lawful for
an assessee to contend that the income-tax authority has acquiesced in
the decision on the disputed issue by not filing an appeal or application for
reference in any case.
In view of above provision, it would be in order for the Income-tax
Department to move an appeal to the Tribunal against the orders of the
CIT(A) in respect of A.Y. 2025-26 both for Shweta and Shefali, assuming
the tax effect of each of them exceeds the specified monetary limits.
(ii) Section 276CC provides for prosecution for wilful failure to furnish a return
of income within the prescribed time, in a case where tax would have been
evaded had the failure not been discovered. Since the amount of tax which
would have been evaded does not exceed ` 25 lakh, the imprisonment
would be for a term of 3 months to 2 years. In addition, fine would also be
attracted.
However, in a case where the return of income is not filed within the due
date, prosecution proceedings will not be attracted if the tax payable by a
person, other than a company, on the total income determined on regular
assessment, as reduced by the advance tax, if any, paid and any tax
deducted at source, does not exceed ` 10,000.
In this case, even though the tax liability of the firm as per the original order
of assessment exceeded ` 10,000, however, as a result of the order of the
Commissioner (Appeals), it got reduced to ` 9,100, which is less than
` 10,000. Therefore, since the tax liability of the firm on final assessment
was determined at ` 9,100 the prosecution proceedings are not
maintainable.
In Guru Nanak Enterprises v. ITO (2005) 279 ITR 30, where the facts were
similar, the Supreme Court held that prosecution was unwarranted.
(iii) Every assessee would be liable to tax@30% in respect of his undisclosed
foreign income and asset of the previous year. Undisclosed foreign asset
would be liable to tax in the previous year in which such asset comes to
the notice of the Assessing Officer.

14
 Section 2(2) of the Black Money (Undisclosed Foreign Income and Assets)
and Imposition of Tax Act, 2015 defines “assessee” to include a person
being -
(a) a resident in India within the meaning of section 6 of the Income-tax
Act, 1961 in the previous year; or
(b) a non-resident or not ordinarily resident in India within the meaning
of section 6(6) of the Income-tax Act, 1961 in the previous year but
who was resident in India either in the previous year to which the
income referred to in section 4 relates; or in the previous year in
which the undisclosed asset located outside India was acquired.
Mr. Rajiv is non-resident for the P.Y. 2024-25 (the previous year in which
notice is issued by the Assessing Officer), since he returned to the
Sigapore in April 2020 and visited every year only for 1 month. He was also
a non-resident for the P.Y. 2012-13, when he acquired shares of listed
companies in Singapore and P.Y. 2020-21, when he established a leather
goods manufacturing factory in Malaysia, since he was in India only during
the previous years from P.Y. 2013-14 to P.Y. 2019-20. However, he was
resident in India in the P.Y. 2015-16, when he acquired one apartment in
Canada.
Accordingly, the issue of notice on Mr. Rajiv under section 10 of the Black
Money Act, 2015, is tenable in law, in respect of apartment in Canda since
he was resident in the previous year 2015-16 when the property was
acquired.
However, notice issued in respect of shares of listed companies in
Singapore acquired in the P.Y.2012-13 and leather goods manufacturing
factory established in Malaysia in the P.Y.2020-21 is not tenable in law,
since Mr. Rajiv was non-resident in the previous years in which undisclosed
assets were acquired and also in the previous year in which it comes to the
notice of Assessing Officer.
(b) A hybrid mismatch is an arrangement that exploits a difference in the tax treatment
of an entity or an instrument under the laws of two or more tax jurisdictions to
achieve double non-taxation.
Branch mismatches arise where the ordinary rules for allocating income and
expenditure between the branch and head office result in a portion of the net
income of the taxpayer escaping the charge to taxation in both the branch and
residence jurisdiction. Unlike hybrid mismatches, which result from conflicts in the

15
 legal treatment of entities or instruments, branch mismatches are the result of
differences in the way the branch and head office account for a payment made by
or to the branch.
Hybrid mismatch arrangements arise due to -
(i) Creation of two deductions for a single borrowal
(ii) Generation of deductions without corresponding income inclusions
(iii) Misuse of foreign tax credit
(iv) Participation exemption regimes
Specific country laws that allow taxpayers to opt for the tax treatment of certain
domestic and foreign entities may aid hybrid mismatches.
BEPS Action Plan 2 gives recommendations to neutralise the effects of hybrid
mismatch arrangements, which include general changes to domestic law followed
by a set of dedicated anti-hybrid rules. Treaty changes are also recommended.
The 2017 report includes specific recommendations for improvements to domestic
law intended to reduce the frequency of branch mismatches as well as targeted
branch mismatch rules which adjust the tax consequences in either the residence
or branch jurisdiction in order to neutralise the hybrid mismatch without disturbing
any of the other tax, commercial or regulatory outcomes.
6. (a) The Assessing Officer can exercise his power of survey under section 133A only
after obtaining the approval of the Principal Director General or the Director
General or the Principal Chief Commissioner or the Chief Commissioner.
Assuming that he has obtained such approval in this case, he is empowered under
section 133A to enter any place of business of the assessee within his jurisdiction
only during the hours at which such place is open for the conduct of business .
In the case given, the “Silver” a popular Gym is open from 5.00 a.m. to 10.00 p.m.
for the conduct of business. The Assessing Officer entered the Gym at 9:30 pm in
the night which falls within the working hours of the Sports Complex.
Therefore, the claim made by the owner to the effect that the Assessing Officer
could not enter the Gym at night is not valid.
Further, as per section 133A(3)(ia), the Assessing Officer may, impound and
retain in his custody for such period as he thinks fit, any books of account or other
documents inspected by him after recording reasons for doing so. However, the
Assessing Officer cannot remove cash kept at the Gym. Moreover, he shall not
retain any books of account or other documents in his custody for a period

16
 exceeding 15 days (excluding holidays) without obtaining the approval of the
Principal Chief Commissioner or Chief Commissioner or Principal Director
General or Director General or the Principal Commissioner or Commissioner or
Principal Director or Director, as the case may be.
(b) Tax Planning / Tax Management / Tax Evasion
Answer Reason
(I) Tax planning Depositing money in PPF and claiming deduction under
section 80C is as per the provisions of law. Hence, it is
a legitimate tax planning measure which enables her to
reduce her tax liability by claiming a deduction
permissible under the Income-tax Act, 1961.
(II) Tax evasion An air conditioner fitted at the residence of a director as
per the terms of his appointment would be a furniture
qualifying for depreciation@10%, whereas an air
conditioner fitted in a factory would be a plant qualifying
for a higher depreciation@15%. The wrong treatment
unjustifiably increases the amount of depreciation and
consequently, reduces profit and consequent tax
liability. Treatment of air-conditioner fitted at the
residence of a director as a plant fitted at the factory
would tantamount to furnishing of false particulars with
an attempt to evade tax.

(c) (i) Yes, the above income are subject to deduction of tax at source.
Income referred to in section 115BBA (i.e., Participation in hockey
tournaments in India and Contribution of an article relating to the sport of
hockey in a sports magazine in India) is subject to deduction of tax at
source@20% under section 194E.
Income referred to in section 115BB (i.e., winnings from lotteries) is subject
to deduction of tax at source@30% under section 194B.
Since Mr. Mr. Robert Jonson, is a non-resident, the amount of tax to be
deducted calculated at the prescribed rates mentioned above, would be
increased by health and education cess@4%.
(iii) Section 115BBA provides that if the total income of the non-resident
sportsman or non-resident entertainer comprises of only income referred
to in that section and tax deductible at source has been fully deducted, it
shall not be necessary for him to file his return of income.

17
 In this case, although Mr. Robert Jonson is a non-resident sportsman, he
has winnings from lotteries as well. Therefore, he cannot avail the benefit
of exemption from filing of return of income as contained in section
115BBA. Hence, he has to file his return of income for A.Y.2025-26.
(d) Section 245Q(3) of the Income-tax Act, 1961 provides that an applicant, who has
sought for an advance ruling, may withdraw the application within 30 days from
the date of the application. Since more than 30 days have elapsed from the date
of application by Mr. Saiyyam to the Authority for Advance Rulings, he cannot
withdraw the application.
However, the Authority for Advance Rulings (AAR), in M.K. Jain AAR No.644 of
2004, has observed that though section 245Q(3) provides that an application may
be withdrawn by the applicant within 30 days from the date of the application, this,
however, does not preclude the AAR from permitting withdrawal of the application
after the said period with its permission, if the circumstances of the case so justify.

18
 Mock Test Paper - Series II: April, 2025
Date of Paper: 9th April, 2025
Time of Paper: 2 P.M. to 5 P.M.
FINAL COURSE: GROUP – II
PAPER – 4: DIRECT TAX LAWS & INTERNATIONAL TAXATION
SOLUTIONS
Division A – Multiple Choice Questions
Answer Keys
MCQ Answer
No.
1 (c) Tax is deductible@10% on ` 20,000 distributed to Mr. Xavier and @5.2%
on ` 1 lakh distributed to Mr. Yatin
2 (c) Tax Evasion
3 (b) Only the cost of acquisition is allowed as a deduction to Mr. Xavier.
Interest expense is not deductible.
4. (d) Yes; ` 510
5. (c) Yes; ` 4,000
6. (a) No tax is required to be deducted at source u/s 194M.
7. (b) Yes; ` 6,600 to be deducted on the amount payable to Phoenix LLC; No
deduction is, however, required on the amount payable to DaVita Inc.
8. (a) ` 5,70,960
9. (b) No, Turmeric Ltd. is not required to deduct tax at source.
10. (a) Yes, Turmeric Ltd. is required to deduct tax at source of ` 1,42,14,720
11. (a) ` 1,42,14,720
12. (d) No, not required to file return of income, if Turmeric Ltd. deducted tax at
source on such income.
13. (d) ` 5 crores
14. (c) Only IV
15. (c) (i) and (iii)

1
 Division B – Descriptive Choice Questions
1. Computation of total income and tax liability of M/s Suraj Industries Ltd. for the
A.Y. 2025-26 as per section 115BAA
Particulars Amount in `
I Profits and gains of business and profession
Net profit as per Statement of Profit and Loss 9,50,00,000
Add: Items debited but to be considered
separately or to be disallowed
(i) Depreciation as per useful life of assets 2,80,00,000
(ii) Donation to political party 12,00,000
[Since donation to political party is not
wholly and exclusively for the purpose of
business or profession, it is not allowable
as deduction u/s 37. Since the amount of
contribution is debited to statement of profit
and loss, the same has to be added back]
(iii) Contribution to research institution 50,00,000
approved and notified by the Central
Government for scientific research
[As per section 35(1)(ii), 100% deduction is
allowed for amount paid to a research
institution undertaking scientific research,
if such institution is approved for this
purpose and notified by the Central
Government. However, since company is
opting for section 115BAA, deduction in
respect of this contribution is not allowed.
Since the amount of contribution is debited
to statement of profit and loss, the same is
required to be added]
(vi) Interest on borrowing to State Bank of 35,00,000
India (SBI) [10% x ` 420 lakhs x 10/12]
[Interest on borrowing from SBI upto
31.12.2024, being the date when
machinery is installed and put to use, is
not allowable as deduction since it has to
be capitalized as part of the cost of the
asset. Interest for January, February and
March 2025 is disallowed as per section

2
 43B since it is not paid on or before the
due date of filing return of income i.e.,
31.10.2025. Since the entire interest has
been debited to the statement of profit and
loss, it has to be added back while
computing business income]
(viii) Salary for installation of machinery 1,00,00,000
[As per ICDS V, expenses which are
specifically attributable for bringing the
fixed asset to its working condition would
form part of actual cost. Therefore, salary
to foreign technicians for installation of
machinery is a capital expenditure and not
allowable as deduction. Since it has been
debited to the statement of profit and loss,
it has to be added back while computing
business income]
4,77,00,000
14,27,00,000
Less: Items credited but not chargeable to
tax or chargeable to tax under other
head of income/expenses allowed but
not debited
(iv) Dividend received from foreign 15,00,000
company
[Dividend received from foreign company
is taxable under the head “Income from
other Source”. Since the same has been
credited to Statement of Profit and loss, it
has to be deducted while computing
business income.
(v) Long-term capital gain on sale of equity 4,00,000
shares
[Long-term capital gain on sale of equity
shares is taxable under the head “Capital
Gains”. Since the same has been credited
to Statement of Profit and loss, it has to be
deducted while computing business
income.

3
(vii) Profit on sale of plot of land 8,00,000
Capital gains arising on sale of plot of land
are taxable under the “Capital Gains”.
Since the same has been credited to the
statement of profit and loss, the same has
to be reduced while computing business
income]
(ix) Bad debt recovered 10,00,000
[The deduction of bad debt allowed u/s 36
was ` 12 lakhs out of the total debt of ` 22
lakhs; The excess of amount recovered
i.e., ` 11 lakhs over the amount due after
bad debt allowance i.e., ` 10 lakhs will be
taxable as business income. Since the
entire amount of ` 11 lakhs recovered has
been credited to the statement of profit and
loss, ` 10 lakhs has to be reduced while
computing business income.]
37,00,000
13,90,00,000
Less: Depreciation as per Income-tax 1,50,00,000
Rules, 1962
Depreciation on assets acquired during the
P.Y. 2024-25
- Office building
Purchased and put to use on 15.12.2024
[` 300 lakhs x 10% x 50%, since it has
been put to use for less than 180 days
during the year] 15,00,000
- Computer
Purchased and put to use on 11.5.2024
[` 25 lakhs x 40%, since it has been put to
use for 180 days or more during the year] 10,00,000
- Plant and machinery
On P & M installed and put to use on
31.12.2024
[` 624.5 lakhs (` 500 lakhs + ` 100 lakhs of
salary for installation + ` 24.5 lakhs, being
interest from 1.6.2024 to 31.12.2024) x 15%

4
 x 50%, since it has been put to use for less 46,83,750 2,21,83,750
than 180 days during the year]
Additional depreciation (since company is opting
for section 115BAA, additional depreciation is - -
not allowed)
Profits and gains from business or 11,68,16,250
profession
II Capital Gains
Profit on sale of plot of land -
[Short-term capital gains arise on sale of plot of
land held for less than 24 months. However, in
this case, since the transfer is to a 100%
subsidiary company, which is an Indian
company, the same would not constitute a
transfer for levy of capital gains tax as per
section 47(iv)]
Long-term capital gain on listed equity 4,00,000 4,00,000
shares
III Income from Other Sources
Dividend received from a foreign company 15,00,000
Gross Total Income 11,87,16,250
Less: Deduction under Chapter VI-A
Deduction under section 80GGB [Donation to -
political party is not allowable as deduction to Suraj
Industries Ltd., since the company is opting for
section 115BAA]
Deduction under section 80M allowable, even if, 12,00,000
company is opting for section 115BAA, to the extent
of lower of dividend received and dividend
distributed. Therefore, ` 12,00,000, being the amount
of dividend distributed allowable as deduction
Total Income 11,75,16,250
Computation of tax liability as per section 115BAA
Particulars Amount in `
Tax payable on LTCG @10% u/s 112A on ` 2,75,000, being the 27,500
LTCG in excess of ` 1,25,000

5
 Tax @ 22% on ` 11,71,16,250 2,57,65,575
2,57,93,075
Add: Surcharge @ 10% [Domestic company opting for section 25,79,308
115BAA, rate of surcharge is 10%]
2,83,72,383
Add: Health and education cess @4% 11,34,895
Tax liability 2,95,07,278
Tax liability (rounded off) 2,95,07,280

2 (a) (i) Computation of total income of Laksh Limited for the A.Y. 2025-26
Particulars ` (in lakhs)
Business income before setting off brought forward 160.00
losses of Pigeon Ltd.
Add: Excess depreciation claimed in the scheme
of amalgamation of Pigeon Limited with
Laksh Limited.
Value at which assets are transferred by 150
Pigeon Ltd.
WDV in the books of Pigeon Ltd. 100
Excess accounted 50
Excess depreciation claimed in computing
taxable income of Laksh Ltd. [` 50 lakhs × 7.50
15%] [Explanation 2 to section 43(6)]
167.50
Set-off of brought forward business loss of (125.00)
Pigeon Ltd. (See Notes 2 & 4)
Set-off of unabsorbed depreciation under (20.00)
section 32(2) read with section 72A (See
Notes 2 & 4)
Set-off of unabsorbed capital expenditure
under section 35(1)(iv) read with section (2.50)
35(4) (See Note 5)
Business income 20.00

Notes:
1. It is presumed that the amalgamation is within the meaning of
section 72A of the Income-tax Act, 1961.

6
2. In the case of amalgamation of companies, the unabsorbed losses
and unabsorbed depreciation of the amalgamating company shall
be deemed to be the loss or unabsorbed depreciation of the
amalgamated company for the previous year in which the
amalgamation was effected and such business loss and
unabsorbed depreciation shall be carried forward and set-off by
the amalgamated company for a period of 8 years and indefinitely,
respectively.
3. As per section 72A(7), the accumulated loss to be carried forward
specifically excludes loss sustained in a speculative business.
Therefore, speculative loss of ` 5.5 lakhs of Pigeon Ltd. cannot be
carried forward by Laksh Ltd.
4. Section 72(2) provides that where any allowance or part thereof
unabsorbed under section 32(2) (i.e., unabsorbed depreciation) or
section 35(4) (i.e., unabsorbed scientific research capital
expenditure) is to be carried forward, effect has to be first given to
brought forward business losses under section 72.
5. Section 35(4) provides that the provisions of section 32(2) relating
to unabsorbed depreciation shall apply in relation to deduction
allowable under section 35(1)(iv) in respect of capital expenditure
on scientific research related to the business carried on by the
assessee. Therefore, unabsorbed capital expenditure on scientific
research can be set-off and carried forward in the same manner as
unabsorbed depreciation.
6. The restriction contained in section 73 is only regarding set-off of
loss computed in respect of speculative business. Such a loss can
be set-off only against profits of another speculation business and
not non-speculation business. However, there is no restriction
under the Income-tax Act, 1961 regarding set-off of normal
business losses against speculative income. Therefore, normal
business losses can be set-off against profits of a speculative
business.
Consequently, there is no loss or allowance to be carried forward by
Laksh Ltd. to the A.Y. 2026-27

7
 (ii) Computation of taxable Capital gain in the hands of
Mrs. Urvashi for A.Y.2025-26
Particulars `
Full value of consideration 15,50,00,000
As per section 50C, the full value of consideration would
be actual sales consideration since the stamp duty value
as on 15.10.2024 of ` 17,00,00,000 does not exceed
110% of actual consideration of ` 15,50,00,000.
Less: Cost of acquisition 1,02,00,000
[` 1,02,00,000 (Higher of actual cost of
` 45,00,000 and Fair market value as on 1.4.2001 of
` 1,20,00,000, but restricted to stamp duty value as on
1.4.2001 of ` 1,02,00,000)
[Indexation benefit would not available while computing
capital gains since the property is transferred on or after
23.7.2024]
14,48,00,000
Less: Exemption under section 54 10,00,00,000
[Purchase of one residential plot of ` 8 crores on
18.2.2025 and deposit of ` 3 crores in Capital Gain
Account Scheme on 31.3.2025 (before the date of filing
of return of income) provided that the construction
thereon is completed within the stipulated time of three
years, but restricted to maximum of ` 10 crores]
Taxable long term capital gains 4,48,00,000

(b) Computation of total income and tax liability of Mr. Pradhyuman for
A.Y. 2025-26
Particulars ` `
Income from house property
Gross annual value 1 of house property in Country M 36,40,000
[CMD 52,000 x ` 70/CMD]
Less: Municipal taxes [CMD 6,000 x ` 70/CMD] 4,20,000
Net Annual value 32,20,000
Less: Deduction @30% 9,66,000 22,54,000

1In absence of any information regarding fair rent and standard rent, actual rent is considered as
gross annual value.

8
 Profits and gains from business and profession
Income from sole proprietary concern in India 80,00,000
Share of profit from a partnership firm in India of
` 20 lakhs, is exempt under section 10(2A) Nil
Business profit 80,00,000
Less: Business Loss 2 in Country G (CGD 5200 x 3,64,000
` 70/CGD) 76,36,000
Income from Other Sources
Agricultural income from tea gardens in Country G, 28,00,000
is taxable in India (CGD 40000 x ` 70/CGD)
Dividend income from Country M (CMD 30000 x
` 70/CGD) 21,00,000 49,00,000
Gross Total Income 1,47,90,000
Less: Deductions under Chapter VI-A
Under section 80C [deposit in PPF] 1,50,000
Under section 80D 25,000
[Medi-claim premium paid ` 28,000, restricted to 1,75,000
` 25,000]
Total Income 1,46,15,000
Tax on total income
Tax on ` 1,46,15,000 [(30% x ` 1,36,15,000) plus 41,97,000
` 1,12,500]
Add: Surcharge@15%, since total income exceeds 6,29,550
` 1 crore but does not exceed ` 2 crore
48,26,550
Add: HEC@4% 1,93,062
50,19,612
Average rate of tax in India 34.3456%
[i.e., ` 50,19,612/` 1,46,15,000 x 100]
Rebate u/s 91 in respect of income in Country G
Average rate of tax in Country G 20%
Doubly taxed income [` 28,00,000 – ` 3,64,000] 24,36,000

2 Since the eight year has not expired from the assessment year in which such business loss was
incurred, such business loss can be set-off against current year business income.

9
 Rebate under section 91 on ` 24,36,000 @20%
(lower of average Indian tax rate and rate of tax in 4,87,200
Country G)
Rebate u/s 91 in respect of income in Country M
Average rate of tax in Country M 13.1707%
[CMD 3,000 (30,000 x 10%) + CMD 7800 (52,000 x
15%)/ CMD 82,000] x 100
Doubly taxed income [` 22,54,000 + ` 21,00,000]
Rebate under section 91 on ` 43,54,000
@13.1707% 5,73,452
(lower of average Indian tax rate and rate of tax in
Country G)
Tax liability in India 39,58,960

3. (a) (i) As per Explanation below to section 10(23C)(iiiae), it has been clarified
that the limit of annual receipts of ` 5 crore is qua ‘taxpayer’ and not qua
‘activity’. Therefore, if the aggregate annual receipts from educational
activity and medical activity exceeds ` 5 crores, then exemption under
sub-clause (iiiad) and (iiiae) cannot be availed.
Since, in the present case, the aggregate annual receipt of ` 9 crores
(` 4.5 crores of educational institution and ` 4.5 crores from hospital)
exceeds the threshold of ` 5 crores, exemption under section
10(23C)(iiiad) and (iiiae) cannot be availed, even though the individual
receipts have not exceeded ` 5 crores.
(ii) Computation of taxable income of public charitable trust
Particulars `
(i) Income from property held under trust (net) 14,00,000
(ii) Income (net) from business (incidental to main 6,00,000
objects)
(iii) Voluntary contributions from public [Voluntary 9,00,000
contribution made with a specific direction
towards corpus are alone to be excluded under
section 11(1)(d). In this case, there is no such
direction and hence, included]
29,00,000

10
 Less: 15% of the income eligible for retention / 4,35,000
accumulation without any conditions
24,65,000
Less: Amount applied for the objects of the trust
(i) Amount spent for charitable purposes
(` 12,80,000 - ` 4,80,000) 8,00,000
(ii) Repayment of loan for construction of -
orphan home
Taxable Income 16,65,000

Note: As per Explanation 4(ii) to section 11(1), any application for charitable
or religious purposes, from any loan or borrowing in the concerned year,
shall not be treated as application of income for charitable or religious
purposes. However, the amount not so treated as application, shall be
treated as application in the year in which the loan is repaid. The Fourth
proviso to Explanation 4(ii) to section 11(1) clarifies that this provision will,
however, not apply where application from loan or borrowing is made on or
before 31.3.2021.
Since the amount spent on construction of orphanage was allowed as
deduction in the P.Y. 2020-21, repayment of loan taken for such purposes
will not be allowed as application since it would be tantamount to double
deduction.
(b) (i) Provision of scientific research services falls within the scope of
international transaction under section 92B. Laurus Labs Limited and
Meta Inc. are deemed to be associated enterprises as per section
92A(2)(d), since Meta Inc. guarantees not less than 10% of the total
borrowings of Laurus Labs Limited. Since there is an international
transaction between associated enterprises, transfer pricing provisions
are attracted in this case.
(ii) Where the Assessing Officer has made a primary adjustment of ` 310
lakhs to the transfer price and the same has been accepted by Laurus
Labs Limited, secondary adjustment has to be made in the books of
account as per section 92CE, since the primary adjustment made by the
Assessing Officer and accepted by Laurus Labs Limited exceeds ` 100
lakhs and the primary adjustment is in relation to P.Y.2022-23. The
excess money determined based on the primary adjustment has to be
repatriated to India within 90 days from the date of order, failing which the

11
 same would be deemed as an advance and interest would be attracted at
the one-year marginal cost of fund lending rate of State Bank of India as
on 1.4.2024 + 3.25%, since the international transaction has been
denominated in Indian Rupees. In this case, since the excess money has
not been repatriated within 90 days, the same would be deemed to be an
advance made by Laurus Labs Limited to Meta Inc. and interest would be
attracted@12.25% (9% + 3.25%) from 1.4.2024, being the date of the
order of the Assessing Officer. The interest would amount to ` 37.975
lakhs (i.e., 12.25% of ` 310 lakhs) for the P.Y.2024-25.
Alternatively, Laurus Labs Limited can opt to pay additional income-
tax@20.9664% (tax@18% plus surcharge@12% plus cess@4%) on
` 310 lakhs, which would amount to ` 65 lakhs. In such a case,
secondary adjustment is not required to be made.
4. (a) (i) The Explanation below section 194A(1) provides that where any income
by way of interest other than interest on securities is credited to any
account, whether called ‘interest payable account’ or ‘suspense account’
or by any other name, in the books of account of the person liable to pay
such income, such crediting shall be deemed to be credit of such income
to the account of the payee and provisions of section 194A, shall, thus,
apply.
However, the CBDT has, vide Circular No.3/2010 dated 2.3.2010,
clarified that Explanation below section 194A(1) will not apply in cases of
banks where credit is made to provisioning account on daily/monthly
basis for the purpose of macro monitoring only by the use of CBS
software.
Since no constructive credit to the depositor's / payee's account takes
place while calculating interest on daily / monthly basis in the CBS
software used by banks, tax need not be deducted at source on such
provisioning of interest by banks for the purposes of macro monitoring
only.
In such cases, tax shall be deducted at source on accrual of interest at
the end of the financial year or at periodic intervals as per practice of the
bank or as per the depositor's or payee’s requirement or on maturity or on
encashment of time deposit, whichever event takes place earlier and
wherever the aggregate amount of interest income credited or paid or
likely to be credited or paid during the financial year by the bank exceeds
the limits specified in section 194A i.e., ` 40,000.

12
 In view of the above, the action of the Assessing Officer in disallowing the
interest expenditure credited in a separate account for macro monitoring
purpose is not valid and consequent initiation of penalty proceedings
under section 271C is not tenable in law.
(ii) (I) Section 194D requires deduction of tax at source@10% from insurance
commission, where the commission exceeds ` 15,000.
Reinsurance is different from insurance since there is no direct
contractual relationship between the person insured and the re-insurer.
In order to attract section 194D, the commission or any other payment
covered under the section should be a remuneration or reward for
soliciting or procuring the insurance business. The insurance companies
do not procure business for the reinsurance company nor does the
reinsurer pay commission or other payment for soliciting the business
from the insurance companies. Therefore, section 194D has no
application.
Hence, when profit commission is paid by a reinsurance company to an
insurance company, after the expiry of the term of insurance, in respect of
cases where there is no claim during the operation of the reinsurance
treaty, tax deduction under section 194D is not attracted.
(II) Section 194J provides for deduction of tax at source @10% on any
remuneration or fees or commission, by whatever name called, paid to a
director, which is not in the nature of salary in respect of which tax is
deductible at source under section 192.
Hence, tax is to be deducted at source under section 194J @10% by
Krish Pvt. Ltd. on the commission of ` 3,10,000 paid to Amrish, a part-
time director. The tax deductible under section 194J would be ` 31,000,
being 10% of ` 3,10,000.
(b) (i) Chapter VIII of the Finance Act, 2016, "Equalisation Levy", provides for
an equalisation levy of 6% of the amount of consideration for specified
services received or receivable by a non-resident not having permanent
establishment in India, from a resident in India who carries out business
or profession, or from a non-resident having permanent establishment in
India.
“Specified Service” means
(1) online advertisement;

13
 (2) any provision for digital advertising space or any other facility or
service for the purpose of online advertisement and
(3) any other service as may be notified by the Central Government.
However, equalisation levy shall not be levied-
- where the non-resident providing the specified services has a
permanent establishment in India and the specified service is
effectively connected with such permanent establishment.
- the aggregate amount of consideration for specified service
received or receivable during the previous year does not exceed
` 1 lakh.
- where the payment for specified service is not for the purposes of
carrying out business or profession
In the present case, equalisation levy @6% is chargeable on the amount
of ` 20,00,000 received by Moonland Inc., a non-resident not having a PE
in India from Tekken Ltd., an Indian company. Accordingly, Tekken Ltd.
is required to deduct equalisation levy of ` 1,20,000 i.e., @6% of ` 20
lakhs, being the amount paid towards online advertisement services
provided by Moonland Inc., a non-resident having no permanent
establishment in India. Non-deduction of equalisation levy would attract
disallowance under section 40(a)(ib) of 100% of the amount paid while
computing business income.
(ii) The statement is correct.
Under section 245U, the Board for Advance Rulings shall have all the
powers vested in the Civil Court under the Code of Civil Procedure, 1908
as are referred to in section 131.
Accordingly, the Board for Advance Rulings shall have the same powers
as are vested in a court under the Code of Civil Procedure, 1908, when
trying a suit in respect of the following matters, namely -
(1) discovery and inspection;
(2) enforcing the attendance of any person, including any officer of a
banking company and examining him on oath;
(3) compelling the production of books of account and other
documents; and

14
 (4) issuing commissions.
Therefore, the Board for Advance Ruling has the powers of issuing
commissions.
5. (a) (i) (I) As per section 139(1)(b), an individual is required to file his return if
his total income, without giving effect to deductions under, inter
alia, Chapter VI-A and section 10AA, exceeds the basic exemption
limit. In this case, Mr. Govind’s total income of ` 2,00,000 is lower
than the basic exemption limit of ` 3,00,000/ ` 2,50,000, as the
case may be. However, such a person who is not required to file
his return on account of his total income being lower than the basic
exemption limit, would be required to file return of income if, inter
alia, his turnover in business exceeds ` 60 lakhs during the
previous year. In this case, since Mr. Govind’s turnover from
business for the P.Y.2024-25 is ` 70 lakhs, he has to file return of
his income for A.Y.2025-26.
(II) Gift of ` 50 lakhs received from son is not taxable under section
56(2)(x) in the hands of Mr. Vicky, since his son is his relative, and
gifts from a relative are excluded from the applicability of section
56(2)(x). The only income of Mr. Vicky for the P.Y.2024-25 would
be interest on savings account for a period of 4 days from 28th
March, 2025 to 31st March, 2025 on ` 50 lakhs, which would be
lower than the basic exemption limit. As per section 139(1)(b), an
individual is required to file his return if his total income exceeds
the basic exemption limit. In this case, Mr. Vicky’s total income is
lower than the basic exemption limit of ` 3,00,000/ ` 2,50,000, as
the case may be.
However, such a person who is not required to file his return on
account of his total income being lower than the basic exemption
limit, would be required to file return of income if, inter alia, the
deposit in his savings account is ` 50 lakhs or more during the
previous year.
Since a deposit of ` 50 lakhs has been made in the savings
account of Mr. Vicky in the P.Y.2024-25, he is required to file his
return of income for A.Y.2025-26.
(ii) (I) The proposition is not correct as per law. This is because section
254(2) specifically empowers the Appellate Tribunal to amend any

15
 order passed by it, either suo-moto or on an application made by
the assessee or Assessing Officer, with a view to rectify any
mistake apparent from record, at any time within 6 months from the
end of the month of the order sought to be amended.
The powers of the Tribunal under section 254(2) relating to
rectification of its order are very limited. Such powers are confined
to rectifying any mistake apparent from the record. The mistake
has to be such that for which no elaborate reasons or inquiry is
necessary. Accordingly, the re-appreciation of evidence placed
before the Tribunal during the course of the appeal hearing is not
permitted. It cannot re-adjudicate the issue afresh under the garb
of rectification [CIT vs. Vardhman Spinning (1997) 226 ITR 296 (P
& H), CIT v. Ballabh Prasad Agarwalla (1998) 233 ITR 354 (Cal.) &
Niranjan & Co. Ltd. v. ITAT (1980) 122 ITR 519 (Cal.)]
(II) The proposition is correct in law. A finding of fact cannot be
disturbed by the High Court in exercise of its powers under section
260A. The Income-tax Appellate Tribunal is the final fact finding
authority and the findings of fact recorded by the Tribunal can be
interfered with by the High Court under section 260A only on the
ground that the same were without evidence or material, or if the
finding is contrary to the evidence, or is perverse or there is no
direct nexus between conclusion of fact and the primary fact upon
which that conclusion is based.
In CIT vs. P. Mohanakala (2007) 291 ITR 278 and M. Janardhana
Rao v. Joint CIT (2005) 273 ITR 50, the Apex Court observed that
the High Court had set aside the factual findings of the lower
authorities and the Tribunal without any valid reason. The Apex
Court held that the findings of fact could not be interfered with by
the High Court without carefully considering the facts on record, the
surrounding circumstances and the material evidence. There is no
scope for interference with the factual findings, unless the findings
are per se without reason or basis, perverse and/or contrary to the
material on record.
Hence, only if the issue gives rise to a substantial question of law,
an appeal shall lie before the High Court.

16
(b) Alibaba Ltd. is deemed to have under-reported its income since:
(1) the assessment under 143(3) has the effect of reducing the loss
determined in a return processed under section 143(1)(a); and
(2) the reassessment under section 147 has the effect of converting
the loss assessed under section 143(3) into income.
Therefore, penalty is leviable under section 270A for under-reporting of
income.
Computation of penalty leviable under section 270A
Particulars ` `
Assessment under section 143(3)
Under-reported income:
Loss assessed u/s 143(3) (5,00,000)
(-) Loss determined under section 143(1)(a) (7,50,000)
2,50,000
Tax payable on under-reported income 62,500
@ 25%
Add: HEC@4% 2,500
65,000
Penalty leviable@50% of tax payable 32,500
Reassessment under section 147
Under-reported income:
Total income reassessed under section 147 4,50,000
(-) Loss assessed under section 143(3) (5,00,000)
9,50,000
Tax payable on under-reported income 2,37,500
@ 25%
Add: HEC@4% 9,500
2,47,000
Penalty leviable@50% of tax payable 1,23,500

Note – The applicable rate of tax for Alibaba Ltd. for A.Y.2025-26 is 25%,
since its turnover for the P.Y.2022-23 does not exceed ` 400 crores.

17
 (c) (i) Principle of Contmporanea Expositio
A treaty’s terms are normally to be interpreted on the basis of their
meaning at the time the treaty was concluded. However, this is not a
universal principle.
In Abdul Razak A. Meman’s (2005) 276 ITR 306, the AAR observed that
“there can be little doubt that while interpreting treaties, regard should be
had to material contemporanea expositio. This proposition is embodied in
article 32 of the Vienna Convention and is also referred to in the decision
of the Hon’ble Supreme Court in K. P. Varghese v. ITO [1981] 131 ITR
597.
(ii) Teleological Interpretation
In this approach the treaty is to be interpreted so as to facilitate the
attainment of the aims and objectives of the treaty. This approach is also
known as the ‘objects and purpose’ method.
In case of Union of India v. Azadi Bachao Andolan 263 ITR 706, the
Supreme Court observed that “the principles adopted for interpretation of
treaties are not the same as those in interpretation of statutory legislation.
The interpretation of provisions of an international treaty, including one
for double taxation relief, is that the treaties are entered into at a political
level and have several considerations as their bases.”
One instance is where the Apex Court agreed with the contention of the
Appellant that “the preamble to the Indo-Mauritius DTAA recites that it is
for ‘encouragement of mutual trade and investment’ and this aspect of the
matter cannot be lost sight of while interpreting the treaty.
6. (a) (i) The proviso to section 132B(1)(i) provides that where the person
concerned makes an application to the Assessing Officer, within 30 days
from the end of the month in which the asset was seized, for release of
the asset and the nature and source of acquisition of the asset is
explained to the satisfaction of the Assessing Officer, then, the Assessing
Officer may, with the prior approval of the Principal Chief Commissioner
or Chief Commissioner or Principal Commissioner or Commissioner,
release the asset after recovering the existing liability under the Income-
tax Act, 1961, etc. out of such asset. ‘Existing liability’, however, does
not include advance tax payable. Such asset or portion thereof has to be
released within 120 days from the date on which the last of the
authorisations for search under section 132 was executed.

18
 In this case, since the application was made to the Assessing Officer
within 30 days from the end of the month in which search was conducted,
the department may retain only the amount of existing liability, if any, and
the balance may have to be released within 120 days from the date on
which the last of the authorisations for search under section 132 was
executed.
Note: It may be noted that one of the conditions mentioned above for
release of an asset is that the nature and source of acquisition of the
asset should be explained to the satisfaction of the Assessing Officer.
However, in this case, it has been given that the assessee’s application
for release of the asset, explaining the sources thereof, was turned down
by the Department. If the application was turned down by the Department
due to the reason that it was not satisfied with the explanation given by
the assessee as to the nature and source of acquisition of the asset,
then, the asset (in this case, cash) cannot be released, since the
condition mentioned above is not satisfied.
(ii) The above arrangement of splitting the investment through two
subsidiaries appears to be with the intention of obtaining tax benefit under
the treaty. Further, there appears to be no commercial substance in
creating two subsidiaries as they do not change the economic condition of
investor X Ltd. in any manner (i.e. on business risks or cash flow), and
reveals a tainted element of abuse of tax laws. Hence, the arrangement
can be treated as an impermissible avoidance arrangement by invoking
GAAR. Consequently, treaty benefit would be denied by ignoring Lalit Ltd.
and Mohan Ltd., the two subsidiaries, or by treating Lalit Ltd. and Mohan
Ltd. as one and the same company for tax computation purposes.
(b) The residential status of a foreign company is determined on the basis of place
of effective management (POEM) of the company.
For determining the POEM of a foreign company, the important criteria is
whether the company is engaged in active business outside India or not.
A company shall be said to be engaged in “Active Business Outside India”
(ABOI) for POEM, if
- the passive income is not more than 50% of its total income; and
- less than 50% of its total assets are situated in India; and
- less than 50% of total number of employees are situated in India or are
resident in India; and

19
- the payroll expenses incurred on such employees is less than 50% of its
total payroll expenditure.
Mischief Ltd. shall be regarded as a company engaged in active business
outside India for P.Y. 2024-25 for POEM purpose only if it satisfies all the four
conditions cumulatively.
Condition 1: The passive income of Mischief Ltd. should not be more than
50% of its total income
Total income of Mischief Ltd. during the P.Y. 2024-25 is ` 110 crores [(` 25
crores + ` 50 crores) + (` 20 crores + ` 15 crores)]
Passive income is the aggregate of, -
(i) income from the transactions where both the purchase and sale of goods
is from/to its associated enterprises; and
(ii) income by way of royalty, dividend, capital gains, interest or rental income
whether or not involving associated enterprises;
Passive Income of Mischief Ltd. is ` 50 crores, being sum total of :
(i) ` 15 crores, income from transactions where both purchases and sales
are from/to associated enterprises (` 5 crores in India and ` 10 crores in
Maldives)
(ii) ` 35 crores, being interest and dividend from investment (` 20 crores in
India and ` 15 crores in Maldives)
Percentage of passive income to total income = ` 50 crore/ ` 110 crore x 100
= 45.45%
Since passive income of Mischief Ltd. is 45.45%, which is not more than 50%
of its total income, the first condition is satisfied.
Condition 2: Mischief Ltd. should have less than 50% of its total assets
situated in India
Value of total assets of Mischief Ltd. during the P.Y. 2024-25 is ` 610 crores
[` 210 crores, in India + ` 400 crores, in Maldives]
Value of total assets of Mischief Ltd. in India during the P.Y. 2024-25 is ` 210 crores
Percentage of assets situated in India to total assets = ` 210 crores/` 610
crores x 100 = 34.43%

20
Since the value of assets of Mischief Ltd. situated in India is less than 50% of
its total assets, the second condition for ABOI test is satisfied.
Condition 3: Less than 50% of the total number of employees of Mischief
Ltd. should be situated in India or should be resident in India
Number of employees situated in India or are resident in India is 70
Total number of employees of Mischief Ltd. is 160 [ 70 + 90]
Percentage of employees situated in India or are resident in India to total
number of employees is 70/160 x 100 = 43.75%
Since employees situated in India or are residents in India of Mischief Ltd. are
less than 50% of its total employees, the third condition for ABOI test is
satisfied.
Condition 4: The payroll expenses incurred on employees situated in India
or resident in India should be less than 50% of its total payroll expenditure
Payroll expenses on employees employed in and resident of India = ` 8 crores.
Total payroll expenses = ` 20 crores (` 8 crores + ` 12 crores)
Percentage of payroll expenses of employees situated in India or are
resident in India to the total payroll expenses = 8 x 100/20 = 40%
Since the payroll expenses incurred on employees situated in India or resident in
India is less than 50% of its total payroll expenditure, the fourth condition for
ABOI test is also satisfied.
Thus, since Mischief Ltd. has satisfied all the four conditions, the company would
be said to be engaged in “active business outside India” during the P.Y. 2024-25.
POEM of a company engaged in active business outside India shall be
presumed to be outside India, if the majority of the board meetings are held
outside India.
Since Mischief Ltd. is engaged in active business outside India in the P.Y. 2024-
25 and majority of its board meetings i.e., 5 out of 8, were held outside India,
POEM of Mischief Ltd. would be outside India.
Therefore, Mischief Ltd. would be non-resident in India for the P.Y. 2024-25.

21
 Mock Test Paper - Series I: March, 2025
Date of Paper: 10th March, 2025
Time of Paper: 2 P.M. to 5 P.M.
FINAL COURSE: GROUP – I
PAPER – 1: FINANCIAL REPORTING
ANSWER TO PART – I CASE SCENARIO BASED MCQS
1. Option (a): ` 2,000 capitalised to the cost of inventory; ` 500 debited to profit and
loss account
2. Option (b): ` 5,000 capitalised to the cost of inventory; ` 500 credited to profit and
loss account
3. Option (c) : ` 6,857; ` 643
4. Option (d): ` 9,80,000
5. Option (d) : ` 98,000
6. Option (d) : ` 2,29,500
7. Option (c) : ` 24,000
8. Option (a) : ` 8,550
9. Option (b) : ` 5,67,427
10. Option (c) : ` 4,32,573
11. Option (a) :` 1 crore
12. Option (b) : ` 2 crores
13. Option (d) : ` 2.20 crores; debiting retained earnings by ` 0.20 crore
14. Option (c) : ` 9,50,000
15. Option (a) : Artificial Intelligence (AI) and Machine Learning (ML)

ANSWERS OF PART – II : DESCRIPTIVE QUESTIONS

1. As per the terms and conditions of the partnership deed, the consent of both the
partners shall be required for taking decisions on any matter which may affect the
returns of the business. Here, both the partners have joint control over the business of
the partnership firm as defined under Ind AS 111. Therefore, we can conclude that the
arrangement between A Ltd. and B Ltd. is a joint arrangement under Ind AS 111.

1
Classification of the joint arrangement for the year ended 31 st March, 20X2
Para B15 of Ind AS 111 states that the classification of joint arrangements requires the
parties to assess their rights and obligations arising from the arrangement. When
making that assessment, an entity shall consider the following:
(a) the structure of the joint arrangement.
(b) when the joint arrangement is structured through a separate vehicle:
(i) the legal form of the separate vehicle;
(ii) the terms of the contractual arrangement; and
(iii) when relevant, other facts and circumstances.
Para B24 states that the assessment of the rights and obligations conferred upon the
parties by the legal form of the separate vehicle is sufficient to conclude that the
arrangement is a joint operation only if the parties conduct the joint arrangement in a
separate vehicle whose legal form does not confer separation between the parties and
the separate vehicle (ie the assets and liabilities held in the separate vehicle are the
parties’ assets and liabilities).
As per para 15 of Ind AS 111, a joint operation is a joint arrangement whereby the
parties that have joint control of the arrangement have rights to the assets, and
obligations for the liabilities, relating to the arrangement. Those parties are called joint
operators.
Accordingly, the joint arrangement is carried out through a separate vehicle M/s. Star
Hotel whose legal form does not confer separation between the parties and the
separate vehicle (ie the assets and liabilities held in vehicle M/s. Star Hotel are the
parties’ assets and liabilities ie of A Ltd. and B Ltd.). This is reinforced by the terms
agreed by the parties in their contractual arrangement, which state that A Ltd. and
B Ltd. have rights to the assets, and obligations for the liabilities relating to the
arrangement that is conducted through vehicle M/s. Star Hotel. [As per para B25 and
B28 of Ind AS 111].
Hence, here the joint arrangement is a joint operation.
Recognition in the financial statements of A Ltd. for the year ended
31st March, 20X2
A Ltd. in its financial statements for the year ended 31 st March, 20X2 will recognise its
share of the assets and its share of any liabilities resulting from the arrangement (eg -
accounts payable to third parties) on the basis of its agreed participation share. It will

2
also recognise its share of the revenue and expenses resulting from the hospitality
services provided through M/s Star Hotel.
First floor that is controlled by A Ltd. shall be accounted for by A Ltd. in its financial
statements.
For the two floors (Ground Floor and Third Floor) that are jointly controlled by A Ltd.
and B Ltd., as per the contractual arrangement, both A Ltd. and B Ltd. will jointly and
equally own the legal and beneficial ownership of assets and related liabilities. Thus,
A Ltd. will recognise its 50% share of the revenue and expenses resulting from these
floors.
With respect to second floor, A Ltd. should not account for any items of assets and
liabilities, revenue and expenses in its financial statements.
The assets, liabilities, revenue and expenses should be recognised on a line -by-line
basis based on nature and classification of the respective items and according to the
principles of recognition and measurement prescribed under the respective Ind AS
applicable to such items.
Reclassification of the joint arrangement for the year ended 31 st March, 20X3
As per para B23 of Ind AS 111, the joint arrangement is carried out through a separate
vehicle whose legal form causes the separate vehicle to be considered in its own right
(ie the assets and liabilities held in the separate vehicle are the assets and liabilities of
the separate vehicle and not the assets and liabilities of the parties).
Since the terms of the contractual arrangement in the formation of company
Star Hotel Pvt. Ltd. does not specify the parties have rights to the assets, or
obligations for the liabilities, relating to the arrangement. Instead, the terms of the
contractual arrangement establish that the parties have rights to the net assets of
Star Hotel Pvt. Ltd.
The legal form of the company confers separation between the shareholders and the
company. Further, as per the shareholders’ agreement, the individual assets and
liabilities of the business are legally beneficial to the company rather than the
shareholders. Upon liquidation of the company, its net assets, after repayment of all its
liabilities, shall be distributed to the shareholders in the proportion of share capital held
by them. It implies that the shareholders have rights to the assets of the company.
This is a key characteristic of a joint venture.
The terms and conditions of the shareholders’ agreement do not modify or reverse the
rights and obligations conferred by the legal form of the company.

3
 Therefore, on the basis of the description of terms and conditions of the shareholders’
agreement, there are no other facts and circumstances that indicate that the parties
have rights to substantially all the economic benefits of the assets relating to the
arrangement, and that the parties have an obligation for the liabilities relating to the
arrangement.
Hence, the joint arrangement shall be reclassified from a joint operation to a joint
venture in the financial statements of A Ltd. for the financial year ended
31st March, 20X3.
Recognition in the consolidated financial statements of A Ltd. for the year ended
31st March, 20X3
As per Para 24 of Ind AS 111, a joint venturer shall recognise its interest in a joint
venture as an investment and shall account for that investment using the equity method
in accordance with Ind AS 28 ‘Investments in Associates and Joint Ventures’ unless the
entity is exempted from applying the equity method as specified in that standard.
Accordingly, A Ltd. shall recognise its right to the net assets of Star Hotel P vt. Ltd. as
investment and account for it using the equity method assuming that the right to sell the
shares to B Ltd. is not substantive and will not have any implication on the assessment
as it will not alter the joint arrangement.
Note: Right to sell 50% shares by A Ltd. has been ignored, since the right to exercise
the option rest with A Ltd. and not B Ltd. Hence, B Ltd. is under obligation to buy but
do not have potential voting rights.
2. (a) The OCPS is redeemable at the end of the 5 th year. Hence, the preference
share contains a liability component. Further the dividend payable on the
preference shares is non-cumulative. The holder may also be able to convert
the preference shares at his option any time until maturity.
Paragraph AG 37 of Ind AS 32, Financial Instruments: Presentation states that
non-cumulative dividends paid at the discretion of the issuer entity is part of
equity element.
Paragraph 29 of Ind AS 32, Financial Instruments: Presentation, requires
separate recognition of components of a financial instrument that (a) creates a
financial liability of the entity; and (b) grants an option to the holder of the
instrument to convert it into fixed number of equity instruments of the entity.
From the above paragraphs it is clear that OCPS issued by ABC Ltd. has a
financial liability component as well as an equity component, making it a
compound financial instrument.

4
As per paragraph 32, in case of compound financial instruments, the issuer first
determines the carrying amount of the financial liability component by measuring
the fair value of a similar liability that does not have an associated equity
component. The carrying amount of the equity represented by (a) non-
cumulative dividend feature and (b) option to convert the preference shares for
fixed number of pre-determined ordinary shares is then determined by deducting
the fair value of the financial liability component from the fair value of the
compound financial instrument as a whole.
Measurement and recognition (Calculations have been done at full scale):
At 7% market rate of interest, the fair value of the financial liability component
of the OCPS is ` 71,29,862 [100,000 OCPS x ` 100 x (1/ (1+7%)) 5]
The fair value of the equity component is (residual value) ` 28,70,138
[` 1,00,00,000 - ` 71,29,862]
Journal Entries
1 st April,
On Initial recognition ` `
20X1 Bank Dr. 1,00,00,000
To OCPS (Financial liability) 71,29,862
To OCPS (Equity) 28,70,138
(Being OCPS issued and
recognised)
31 March, Interest expense – unwinding
st

20X2 of discount
Interest expense @ 7% Dr. 4,99,090
(Refer W.N.)
To OCPS (Financial liability) 4,99,090
(Being interest recorded as per
EIR)
Interest entry will be passed
every year till conversion
option is not exercised
Whenever the option is
exercised by the holder to
convert to equity shares
OCPS (Financial liability) Dr. Balance on date of
To OCPS (Equity) exercise of the option

5
 As per paragraph 30, in case of a convertible financial instrument, the
classification of the liability and equity components is not revised as a result of
change in the likelihood that a conversion option will be exercised.
In other words, the amount attributable to equity component on initial recognition
shall remain in equity and will not be reclassified even if the OCPS are ultimately
redeemed in cash by the issuer.
31st March, If redeemed in cash on ` `
20X6 maturity
OCPS (financial liability) Dr. 1,00,00,000
(Refer W.N.)
To Bank 1,00,00,000
(Being OCPS redeemed on
maturity)

Working Note:
Calculation of the amortised cost of the financial liability (at full scale):
Year Opening Balance Interest @ 7% Repayment Closing
(`) Balance (`)
1 71,29,862 4,99,090 - 76,28,952
2 76,28,952 5,34,027 81,62,979
3 81,62,979 5,71,409 87,34,388
4 87,34,388 6,11,407 93,45,795
5 93,45,795 6,54,206 10,000,000 -

(b) As per Rule 4(1)(ii)(a) of the Companies (Indian Accounting Standards) Rules,
2015, X Ltd. having net worth of ` 600 crores at the end of the financial year
2015-2016, would be required to prepare its financial statements for the
accounting periods commencing from 1 st April, 2016, as per the Companies
(Indian Accounting Standards) Rules, 2015. While Y Ltd. having net worth of
` 150 crores in the year 2015-2016, would be required to prepare its financial
statements as per the Companies (Accounting Standards) Rules, 2006.
Since, the foreign company ABC Inc., is not a company incorporated under the
Companies Act, 2013 or the earlier Companies Act, 1956, it is not required to
prepare its financial statements as per the Companies (Indian Accounting
Standards) Rules, 2015. As the foreign company is not required to prepare
financial statements based on Ind AS, the net worth of foreign company

6
 ABC Inc. would not be the basis for deciding whether Indian Subsidiary X Ltd.
and Y Ltd. are required to prepare financial statements based on Ind AS.
3. (a) On initial measurement, X Ltd. will measure the lease liability and ROU asset as
under:
Year Lease Present Present Value Conversion INR value
Payments Value factor of Lease rate (spot
(USD) @ 5% Payment rate)
1 10,000 0.952 9,520 68 6,47,360
2 10,000 0.907 9,070 68 6,16,760
3 10,000 0.864 8,640 68 5,87,520
4 10,000 0.823 8,230 68 5,59,640
5 10,000 0.784 7,840 68 5,33,120
Total 43,300 29,44,400

As per Ind AS 21 The Effects of Changes in Foreign Exchange Rates,

monetary assets and liabilities are restated at each reporting date at the
closing rate and the difference due to foreign exchange movement is
recognised in profit and loss whereas non-monetary assets and liabilities
carried measured in terms of historical cost in foreign currency are not
restated.
Accordingly, the ROU asset in the given case being a non-monetary asset
measured in terms of historical cost in foreign currency will not be restated but
the lease liability being a monetary liability will be restated at each reporting date
with the resultant difference being taken to profit and loss.
At the end of Year 1, the lease liability will be measured in terms of USD as
under:
Lease Liability:
Year Initial Value (USD) Lease Interest @ Closing Value
(a) Payment 5% (USD)
(b) (c) = (a x 5%) (d = a + c - b)
1 43,300 10,000 2,165 35,465

Interest at the rate of 5% will be accounted for in profit and loss at average
rate of ` 69 (i.e., USD 2,165 x 69) = ` 1,49,385.

7
 Particulars Dr. (`) Cr. (`)
Interest Expense Dr. 1,49,385
To Lease liability 1,49,385

Lease payment would be accounted for at the reporting date exchange rate,
i.e. ` 70 at the end of year 1
Particulars Dr. (`) Cr. (`)
Lease liability Dr. 7,00,000
To Cash 7,00,000

As per the guidance above under Ind AS 21, the lease liability will be restated
using the reporting date exchange rate i.e., ` 70 at the end of Year 1.
Accordingly, the lease liability will be measured at ` 24,82,550 (35,465 x ` 70)
with the corresponding impact due to exchange rate movement of ` 88,765
(24,82,550 – (29,44,400 + 1,49,385 – 700,000) taken to profit and loss.
At the end of year 1, the ROU asset will be measured as under:
Year Opening Balance (`) Depreciation (`) Closing Balance (`)
1 29,44,400 5,88,880 23,55,520

(b) Translation of the balances for the purpose of consolidation

USD Rate L$
Property, plant and equipment 50,000 1.13 44,248
Receivables 9,35,000 1.13 8,27,434
Total assets 9,85,000 8,71,682
Issued capital 50,000 — 30,055
Opening retained earnings 28,000 — 15,274
Profit for the year 20,000 1.175 17,021
Accounts payable 8,40,000 1.13 7,43,363
Accrued liabilities 47,000 1.13 41,593
Total equity and liabilities USD 9,85,000 8,47,306
Foreign Currency Translation Reserve 24,376
(Refer WN-1)
Total equity and liabilities L$ 8,71,682

8
 Working Note:
1. Cumulative balance of the FCTR
Particulars Actual Amount Difference
translated (Refer WN-2)
amount in L$
A B B-A
Issued capital 30,055 44,248 14,193
Opening retained 15,274 24,779 9,505
earnings
Profit for the year 17,021 17,699 678
62,350 86,726 24,376

2. Translated amount if the same conversion rate is applied to

following items as applied on other items
Translated amount
Issued capital 50,000 1.13 44,248
Opening retained earnings 28,000 1.13 24,779
Profit for the year 20,000 1.13 17,699
98,000 86,726

4. (a) Journal Entries

31 st March, 20X2 `
Employee benefits expenses Dr. 4,60,000
To Share based payment reserve (equity) 4,60,000
(Being expenses to the extent of 1/3 of expected
vested equity instruments value recognized)
Profit and Loss Account Dr. 4,60,000
To Employee benefits expenses 4,60,000
(Being expenses transferred to Profit and Loss
Account)
31 st March, 20X3
Share based payment reserve (equity) Dr. 40,000
To Employee benefits expenses 40,000
(2/3 of expected vested equity instruments value)

9
 Employee benefits expenses Dr. 40,000
To Profit and Loss Account 40,000
(Being expenses transferred to Profit and Loss
Account)
31 st March, 20X4
Employee benefits expenses Dr. 3,80,000
To Share based payment reserve (equity) 3,80,000
(Final vested equity instruments value)
Profit and Loss Account Dr. 3,80,000
To Employee benefits expenses 3,80,000
(Being expenses transferred to Profit and Loss
Account)
31 st March, 20X5
Share based payment reserve (equity) Dr. 8,00,000
Bank Account (150 x 100 x 30) Dr. 4,50,000
To Share Capital [150 x 100 x 10] 1,50,000
To Securities Premium [150 x 100 x (50+20)] 10,50,000
To Retained Earnings (10 x 100 x 50) 50,000
(Being 150 options exercised and 10 options
lapsed)

Calculation of employee benefits expenses

Year ended Calculation Expense Cumulative
31 st March for Period expense
` `
20X2 (300 – 10 - 14) employees x 4,60,000 4,60,000
100 shares x ` 50 x 1/3 years
20X3 [{(300 – 10 - 110 - 54) (40,000) 4,20,000
employees x 100 shares x
` 50 x 2/3 years} - 4,60,000]
20X4 [(160 employees x 100 shares 3,80,000 8,00,000
x ` 50) - 4,20,000]

(b) As per Ind AS 23, when an entity borrows funds specifically for the purpose of
obtaining a qualifying asset, the entity should determine the amount of
borrowing costs eligible for capitalisation as the actual borrowing costs

10
incurred on that borrowing during the period less any investment income on
the temporary investment of those borrowings.
The amount of borrowing costs eligible for capitalization, in cases where the
funds are borrowed generally, should be determined based on the
capitalisation rate and expenditure incurred in obtaining a qualifying asset.
The costs incurred should first be allocated to the specific borrowings.
Analysis of expenditure:

Date Expenditure Amount allocated in Weighted for period

general borrowings outstanding
(` ’000) (` ’000) (` ’000)
1st April, 20X1 200 0 0
30th June, 20X1 600 100* 100 × 9/12 = 75
31st Dec., 20X1 1,200 1,200 1,200 × 3/12 = 300
31st March, 20X2 200 200 200 × 0/12 = 0
Total 2,200 375

*Specific borrowings of ` 7,00,000 fully utilized on 1 st April & on 30 th June to

the extent of ` 5,00,000 hence remaining expenditure of ` 1,00,000 allocated
to general borrowings.
The capitalisation rate relating to general borrowings should be the weighted
average of the borrowing costs applicable to the entity’s borrowings that are
outstanding during the period, other than borrowings made specifically for the
purpose of obtaining a qualifying asset.
(10,00,000×12.5%) + (15,00,000×10%)
Capitalisation rate = = 11%
10,00,000+15,00,000

Borrowing cost to be capitalized: Amount (`)

On specific loan 65,000
On General borrowing (3,75,000 x 11%) 41,250
Total 1,06,250
Less: interest income on specific borrowings (20,000)
Amount eligible for capitalization 86,250
Therefore, the borrowing costs to be capitalized are ` 86,250.

11
5. (a) (i) As per para 27 of Ind AS 115, a good or service that is promised to a
customer is distinct if both of the following criteria are met:
(a) the customer can benefit from the good or service either on its own
or together with other resources that are readily available to them.
A readily available resource is a good or service that is sold
separately (by the entity or another entity) or that the customer has
already obtained from the entity or from other transactions or
events; and
(b) the entity’s promise to transfer the good or service to the customer
is separately identifiable from other promises in the contract.
Factors that indicate that two or more promises to transfer goods or
services to a customer are separately identifiable include, but are not
limited to, the following:
(a) significant integration services are not provided (i.e. the entity is
not using the goods or services as inputs to produce or deliver
the combined output called for in the contract)
(b) the goods or services does not significantly modify or customize
other promised goods or services in the contract.
(c) the goods or services are not highly inter-dependent or highly
interrelated with other promised goods or services in the contract
Accordingly, on 1 st April, 20X1, entity A entered into a single transaction
with three identifiable separate components:
1. Sale of a good (i.e. engineering machine);
2. Rendering of services (i.e. engineering machine maintenance
services on 30 th September, 20X1 and 1st April, 20X2); and
3. Providing finance (i.e. sale of engineering machine and rendering
of services on extended period credit).
(ii) Calculation and allocation of revenue to each component of the
transaction
Date Opening Finance Goods Services Payment Closing
balance income received balance
1 st April, – – 2,51,927 – – 2,51,927
20X1
30 th 2,51,927 12,596 – 45,000 – 3,09,523
September, (Note 1)

12
 20X1
31 st March 3,09,523 15,477 – – – 3,25,000
20X2 (Note 2)
1 st April, 3,25,000 – – 75,000 (4,00,000)
20X2

Notes:
1. Calculation of finance income as on 30 th September, 20X1
= 5% x 2,51,927 = ` 12,596
2. Calculation of finance income as on 31 st March, 20X2
= 5% x 3,09,523 = ` 15,477
(iii) Journal Entries
Date Particulars Dr. (`) Cr. (`)
1 st April, 20X1 Mr. Anik Dr. 2,51,927
To Revenue - sale of goods (Profit or 2,51,927
loss A/c)
(Being revenue recognised from the sale of the
machine on credit)
Cost of goods sold (Profit or loss) Dr. 1,60,000
To Inventories 1,60,000
(Being cost of goods sold recognised)
30 th September Mr. Anik Dr. 12,596
20X1 To Finance Income (Profit or loss) 12,596
(Being finance income recognised)
Mr. Anik Dr. 45,000
To Revenue- rendering of services 45,000
(Profit or loss)
(Being revenue from the rendering of
maintenance services recognised)
Cost of services (Profit or loss) Dr. 30,000
To Cash/Bank or payables 30,000
(Being the cost of performing maintenance
services recognised)
31st March Mr. Anik Dr. 15,477
20X2 To Finance Income (Profit or loss) 15,477
(Being finance income recognised)
1 st April, Mr. Anik Dr. 75,000
20X2 To Revenue - rendering of services 75,000

13
 (Profit or loss)
(Being revenue from the rendering of
maintenance services recognised)
Cost of services (Profit or loss) Dr. 50,000
To Cash/Bank or payables 50,000
(Being the cost of performing maintenance
services recognised)
Cash/Bank Dr. 4,00,000
To Mr. Anik 4,00,000
(Being the receipt of cash from the customer
recognised)

(b) Either
1. Service in later years will lead to a materially higher level of benefit than
in earlier year. So, for employees expected to leave after 20 or more
years, the entity should attribute benefit on a straight-line basis under
Para 71. Service beyond 20 years will lead to no material amount of
further benefits. So, the benefit attributed to each of the first 20 years
will be 2.5% of the Present Value of the Expected Medical Costs (50%
÷ 20 years).
2. For employees expected to leave between 10 and 20 years, the benefit
attributed to each of the first 10 years is 1% (10% ÷ 10 years) of the
Present Value of the expected medical costs. For these employees, no
benefit is attributed to service between the end of the tenth year and the
estimated date of leaving.
3. For employees expected to leave within ten years, no benefit is
attributed.
4. The Current Service Cost in each year reflects the probability that the
employee may not complete the necessary period of service to earn
part or all of the benefits.
Or
(i) Yes, an entity whose financial statements comply with Ind AS shall
make an explicit and unreserved statement of such compliance in the
notes. An entity shall not describe financial statements as complying
with Ind AS unless they comply with all the requirements of Ind AS.
(Refer Para 16 of Ind AS 1)
(ii) No, but need to disclose in the financial statement that these are

14
 individual financial statements of the Company. (Refer Para 51(b) of
Ind AS 1)
(iii) Yes, Para 51(d) of Ind AS 1 inter alia states that an entity shall display
the presentation currency, as defined in Ind AS 21 prominently, and
repeat it when necessary for the information presented to be
understandable.
(iv) No, as per Para 38 of Ind AS 1, except when Ind AS permit or require
otherwise, an entity shall present comparative information in respect of
the preceding period for all amounts reported in the current period’s
financial statements. An entity shall include comparative information for
narrative and descriptive information if it is relevant to understanding
the current period’s financial statements.
6. (a) Lease agreement substance presentation
Stakeholders make informed and accurate decisions based on the information
presented in the financial statements and as such, ensuring the financial
statements are reliable and of utmost importance. The directors of Sunshine
Ltd. are ethically responsible to produce financial statements that comply with
Ind AS and are transparent and free from material error. Lenders often attach
covenants to the terms of the agreement in order to protect their interests in an
entity. They would also be of crucial importance to potential debt and equity
investors when assessing the risks and returns from any future investment in
the entity.
The proposed action by Sunshine Ltd. appears to be a deliberate attempt to
circumvent the terms of the covenants. The legal form would require
treatment as a series of short-term leases which would be recorded in the
profit or loss, without any right-of-use asset and lease liability being
recognized as required by Ind AS 116, Leases. This would be a form of ‘off-
balance sheet finance’ and would not report the true assets and obligations of
Sunshine Ltd. As a result of this proposed action, the liquidity ratios would be
adversely misrepresented. Further, the operating profit margins would also be
adversely affected, as the expenses associated with the lease are likely to be
higher than the deprecation charge if a leased asset was recognized, hence
the proposal may actually be detrimental to the operating profit covenant.
Sunshine Ltd. is aware that the proposed treatment may be contrary to Ind AS.
Such manipulation would be a clear breach of the fundamental principles of
objectivity and integrity as outlined in the Code of Ethics. It is important for a

15
 chartered accountants to exercise professional behaviour and due care all the
time. The proposals by Sunshine Ltd. are likely to mislead the stakeholders in
the entity. This could discredit the profession by creating a lack of confidence
within the profession. The directors of Sunshine Ltd. must be reminded of
their ethical responsibilities and persuaded that the accounting treatment must
fully comply with the Ind AS and principles outlined within the framework
should they proceed with the financing agreement.
However, if the CFO fails to comply with his professional duties, he will be
subject to professional misconduct under Clause 1 of Part II of Second
Schedule of the Chartered Accountants Act, 1949. The Clause 1 states that a
member of the Institute, whether in practice or not, shall be deemed to be
guilty of professional misconduct, if he contravenes any of the provisions of
this Act or the regulations made there under or any guidelines issued by the
Council. As per the Guidelines issued by the Council, a member of the
Institute who is an employee shall exercise due diligence and shall not be
grossly negligent in the conduct of his duties.
(b) Computation of balance total equity as on 1 st April, 20X1 after transition
to Ind AS
` in
crore
Share capital- Equity share Capital 80
Other Equity
General Reserve 40
Capital Reserve 5
Retained Earnings (95-5-40) 50
Add: Increase in value of land (10-4.5) 5.5
Add: De recognition of proposed dividend (0.6 0.78
+ 0.18)
Add: Increase in value of Investment 0.75 57.03 102.03
Balance total equity as on 1 st April, 20X1
after transition to Ind AS 182.03
Reconciliation between Total Equity as per AS and Ind AS to be
presented in the opening balance sheet as on 1 st April, 20X1
` in crore
Equity share capital 80
Redeemable Preference share capital 25

16
 105
Reserves and Surplus 95
Total Equity as per AS 200
Adjustment due to reclassification
Preference share capital classified as financial liability (25)
Adjustment due to derecognition
Proposed Dividend not considered as liability as on 0.78
1 st April 20X1
Adjustment due to remeasurement
Increase in the value of Land due to remeasurement at
fair value 5.5
Increase in the value of investment due to
remeasurement at fair value 0.75 6.25
Equity as on 1 st April, 20X1 after transition to Ind AS 182.03

(c) Determination of Enterprise Value of XYZ Ltd.

Particulars ` in crore
EBITDA as on the measurement date 40
EV/EBITDA multiple as on the date of valuation 8
Enterprise value of XYZ Ltd. 320

Determination of subsequent measurement of XYZ Ltd.

Particulars ` in crore
Enterprise Value of XYZ Ltd. 320
ABC Ltd.’s share based on percentage of holding (5% of 320) 16
Less: Liquidity discount & Non-controlling stake discount
(5%+5%=10%) (1.6)
Fair value of ABC Ltd.’s investment in XYZ Ltd. 14.4

17
 Mock Test Paper - Series II: April, 2025
Date of Paper: 11th April, 2025
Time of Paper: 2 P.M. to 5 P.M.
FINAL COURSE: GROUP – II
PAPER – 5: INDIRECT TAX LAWS
SOLUTIONS
Division A – Multiple Choice Questions
Question Answer
No.
1. (a) ` 98 lakh
2. (d) Mr. Samrat is entitled to take the ITC of inputs held in stock on
8th April, 2024.
3. (d) ` 2,70,000
4. (c) (ii) and (iii)
5. (d) No input tax credit is available.
6. (b) 31st December 2030
7. (d) ` 2,02,60,000
8. (a) ` 2,00,10,000
9. (d) (i), (ii) and (iii)
10. (b) Interest liability of Mr. Anshul is ` 444 and he cannot utilize
the input tax credit for the payment of interest. He needs to
pay the interest in cash.
11. (d) ` 4,86,000
12. (a) Nil. There will be no change even if the hotel is located outside
Rajasthan
13. (c) No time limit to issue the show cause notice
14. (b) 30,000
15. (a) (i), (ii) and (iii)

1
 Division B – Descriptive Questions
1. Computation of gross GST liability on outward supply of Rajnath Private Limited
for the month of August
Particulars Value (`) GST (`)
Supply of Product Theta 50,00,000 6,00,000
[Liable to GST @ 12%]
Supply of Product Omega 1,00,00,000 Nil
[Exempt from GST]
Supply of management consultancy services 50,00,000 9,00,000
[Liable to GST @ 18%]
Renting of commercial complex to local traders of 50,00,000 9,00,000
electronic goods
[Services by way of renting of residential dwelling for use
as residence are exempt from GST. Thus, renting of
commercial complex is taxable and GST is payable on
the same @ 18%.]
Export of Product Delta 1,00,00,000 Nil
[Export of goods is a zero-rated supply in terms of
section 16(1)(a) of the IGST Act, 2017. A zero-rated
supply can be made without payment of tax under a LUT
in terms of section 16(3)(a) of that Act.]
Export of consultancy services 20,00,000 Nil
[As per section 2(6) of the IGST Act, 2017, an activity is
treated as export of service if, inter alia, payment for the
service is received in convertible foreign exchange or in
Indian rupees wherever permitted by the RBI. Since in
case of exports to Nepal, RBI regulations allow receipt
of payment in Indian rupees, exports of services to Nepal
are treated as ‘normal exports’.
Export of services is a zero-rated supply in terms of
section 16(1)(a) of the IGST Act, 2017. A zero-rated
supply can be made without payment of tax under a LUT
in terms of section 16(3)(a) of that Act.]
Sale of building 2,50,00,000 Nil
[Sale of building is neither a supply of goods nor a supply
of services in terms of para 5 of Schedule III to the CGST
Act, 2017, provided the entire consideration has been
received after issue of completion certificate by the

2
 competent authority or after its occupation, whichever is
earlier. Hence, the same is not liable to GST.]
Interest received on investment in fixed deposits with 10,50,000 Nil
Haribhari Bank
[Services by way of extending deposits, loans or
advances in so far as the consideration is represented
by way of interest are exempt vide Notification No.
12/2017 CT (R) dated 28.06.2017]
Sale of shares 2,50,00,000 Nil
[Shares are neither goods nor services in terms of
section 2(52) and 2(102) of the CGST Act, 2017. Hence,
sale of shares is neither a supply of goods nor a supply
of services and hence, is not liable to GST.]
Supply of cigarettes [Liable to GST @ 28%] 1,00,00,000 28,00,000
[Excise duty is included in the value since as per section
15(2)(a) of the CGST Act, 2017, value of supply includes
all taxes, duties, cesses other than GST.]
Supply of petrol and diesel 80,00,000 Nil
[Supply of petrol and diesel is not leviable to GST as per
section 9 of the CGST Act, 2017.]
Amount received from Devi Prasad Private Limited for 6,00,000 Nil
sponsorship of the business exhibition
[Tax on services provided by any person by way of
sponsorship to any body-corporate located in taxable
territory is payable by the recipient (Devi Prasad Private
Limited) under reverse charge. Thus, tax on such
services is not payable by Rajnath Private Limited.]
Total GST liability on outward supply 52,00,000

2. (a) Computation of ITC available and net GST payable from Electronic Cash
Ledger for the month of June
Particulars Amount (`)
GST on taxable turnover for the month of June 10,80,000
[` 60,00,000 × 18%]
Less: ITC available for June month in terms of rule 42
Opening balance of ITC available in the ` 1,60,000
Electronic Credit Ledger

3
 Add: ITC credited to the Electronic Credit ` 40,000
Ledger for the month of June [Refer working
note below]
Less: ITC out of common credit attributable to (` 1,290) 1,98,710
exempt supply [Refer working note below]
Net GST payable from Electronic Cash Ledger 8,81,290

Working Note:
Computation of ITC (out of common credit) attributable to exempt supplies
Particulars Amount
(`)
Input tax on raw materials [Note1] 40,000
Input tax on catering for housewarming [Note 2] Nil
Input tax on inputs contained in exempt supplies [Note 3] Nil
Input tax on cosmetic and plastic surgery of CEO of company Nil
[Note 4]
ITC credited to the Electronic Credit Ledger in terms of rule 42 in 40,000
the month of June
Common credit [Note 5] 40,000
ITC attributable towards exempt supplies to be reversed 1,290
[Note 6]

Notes:
(1) Being used in the course or furtherance of business, input tax on raw
materials is available as ITC and is credited to the Electronic Credit Ledger
[Section 16(1) of the CGST Act, 2017].
(2) ITC on outdoor catering is blocked in terms of section 17(5) of the CGST
Act, 2017 if the same is not used for making an outward supply of outdoor
catering or as an element of a taxable composite/mixed supply. Hence, the
same is not credited to the Electronic Credit Ledger [Rule 42 of the CGST
Rules, 2017].
(3) Input tax on inputs used exclusively for making exempt supplies is not
available as ITC and thus, not credited to the Electronic Credit Ledger in
terms of rule 42 of the CGST Rules, 2017.

4
 (4) ITC on cosmetic and plastic surgery is blocked in terms of section 17(5) of
the CGST Act, 2017 if the same are not used for making the same category
of outward supply or as an element of a taxable composite/ mixed supply.
Hence, the same is not credited to the Electronic Credit Ledger [Rule 42 of
the CGST Rules, 2017].
(5) Since there are no inputs and input services which are used exclusively for
effecting taxable supplies, the entire ITC credited to Electronic Credit
Ledger, i.e. ` 40,000 will be the common credit [Rule 42 of the CGST Rules,
2017].
(6) ITC attributable towards exempt supplies = Common credit x (Aggregate
value of exempt supplies during the tax period / Total turnover in the State
during the tax period)
= ` 40,000 × ` 2,00,000/ ` 62,00,000 - (rounded off)
= ` 1,290 (rounded off)
(b) Computation of assessable value of machine imported by SOP & Co.
Particulars Amount (£)
Price of the machine 10,000
Add: Engineering and design charges paid in UK [Note 1] 500
Licence fee relating to imported goods payable by
the buyer as a condition of sale (20% of Price of 2,000
machine) [Note 1]
Total 12,500
Amount (`)
Value in Indian currency [£12,500 x ` 100] [Note 2] 12,50,000
Add: Materials and components supplied by the buyer 20,000
free of cost [Note 1]
FOB 12,70,000
Add: Freight [Note 3] 2,54,000
Insurance paid to the insurer in India [Note 1] 6,000
CIF value 15,30,000
Assessable value 15,30,000
Notes:
1. Engineering and design charges paid in UK, licence fee relating to imported
goods payable by the buyer as a condition of sale, materials and

5
 components supplied by the buyer free of cost and actual insurance
charges paid are all includible in the assessable value [Rule 10 of the
Customs (Determination of Value of Imported Goods) Rules, 2007].
2. As per Explanation to section 14(1) of the Customs Act, 1962, assessable
value should be calculated with reference to the rate of exchange notified
by the CBIC.
3. If the goods are imported by air, the freight cannot exceed 20% of FOB
price [Fifth proviso to rule 10(2) of the Customs (Determination of Value of
Imported Goods) Rules, 2007].
4. Buying commission is not included in the assessable value [Rule 10(1)(a)
of the Customs (Determination of Value of Imported Goods) Rules, 2007].
5. Only ship demurrage charges on chartered vessels are included in the cost
of transport of the imported goods. Thus, demurrage charges for delay in
clearing the machine from the Airport will not be includible in the
assessable value [Explanation to Rule 10(2) of the Customs (Determination
of Value of Imported Goods) Rules, 2007].
3. (a) No, the stand taken by the Department is not correct.
Services by way of health care services by a clinical establishment, an authorised
medical practitioner or para-medics are exempt from GST vide exemption
notification.
Health care services have been defined to mean any service by way of diagnosis
or treatment or care for illness, injury, deformity, abnormality or pregnancy in any
recognised system of medicines in India and includes services by way of
transportation of the patient to and from a clinical establishment, but does not
include hair transplant or cosmetic or plastic surgery, except when undertaken to
restore or to reconstruct anatomy or functions of body affected due to congenital
defects, developmental abnormalities, injury or trauma.
Circular No. 32/06/2018 GST dated 12.02.2018 has clarified that the entire
amount charged by the hospitals from the patients including the retention money
and the fee/payments made to the doctors etc., is towards the healthcare services
provided by the hospitals to the patients and is exempt from GST. In view of the
same, GST is not applicable on the retention money kept by Mohan Medical
Centre.
The circular also clarifies that services provided by senior doctors/ consultants/
technicians hired by the hospitals, whether employees or not, are also healthcare

6
 services exempt from GST. Hence, services provided by the senior doctors and
consultants hired by Mohan Medical Centre, being healthcare services, are also
exempt from GST.
(b) Case I
As per section 12(3) of the IGST Act, 2017 where both the service provider and
the service recipient are located in India, the place of supply of services directly
in relation to an immovable property, including services provided by interior
decorators is the location of the immovable property. However, if the immovable
property is located outside India, the place of supply is the location of the recipient.
Since in the given case, both the service provider (Mr. Sumit Awasthi) and the
service recipient (Mr. Manish Pareek) are located in India and the immovable
property is located outside India (New York), the place of supply will be the
location of recipient, i.e. Maharashtra.
Case II
As per section 13(4) of the IGST Act, 2017, where either the service provider or
the service recipient is located outside India, the place of supply of services
directly in relation to an immovable property including services of interior
decorators is the location of the immovable property.
Since in the given case, service provider (Mr. Sumit Awasthi) is located in India
and service recipient (Mr. Manish Pareek) is located outside India (New York), the
place of supply will be the location of immovable property, i.e. Paris (France).
(c) (1) Provisional assessment of duty is permitted in case where the proper
officer deems it necessary to subject any imported goods or export goods
to any chemical or other test [Section 18 of the Customs Act, 1962]. Thus,
Vinayak Company can pay the duty on provisional basis.
Before, the provisional assessment of duty, the importer must furnish such
security as the proper officer deems fit for the payment of the deficiency, if
any, between the duty finally assessed/re-assessed and the duty
provisionally assessed.
(2) Section 18 of the Customs Act, 1962 further stipulates that the importer is
liable to pay interest, on any amount payable consequent to the final
assessment order @ 15% p.a. from the first day of the month in which the
duty is provisionally assessed till the date of payment thereof.

7
 Accordingly, amount of interest payable will be
= [` 1,50,000 x 15% x 51/365] + [` 50,000 x 15% x 62/365]
= ` 3,144 + ` 1,274 = ` 4,418
4. (a) Proviso to section 50 of the CGST Act, 2017 lays down that the interest on tax
payable in respect of supplies made during a tax period and declared in the return
for the said period furnished after the due date in accordance with the
provisions of section 39 of the CGST Act, 2017, except where such return is
furnished after commencement of any proceedings under section 73 or section 74
of the CGST Act, 2017 in respect of the said period, shall be levied on that portion
of the tax that is paid by debiting the electronic cash ledger.
In the given scenario, Mahima Ltd. has filed its return belatedly and as per the
above provisions, interest is payable on the tax component paid through
Electronic Cash Ledger only. A point relevant to note here is that tax payable on
reverse charge basis also carries interest for the period of delay in remittance of
tax and input tax credit cannot be used to pay the same (i.e. tax payable under
reverse charge has to be paid in cash).
Accordingly, interest under section 50 payable for the tax paid through Electronic
Cash Ledger is computed as below:
IGST: 218,000 *18%*60/365 = 6,450
CGST: 262,000*18%*60/365 = 7,752
SGST: 262,000*18%*60/365 = 7,752
Further, if entire tax payable for January is paid through Electronic Credit ledger,
except for the taxes to be paid under reverse charge basis, then interest under
section 50 of the CGST Act, 2017 is applicable only on the remittance of tax under
reverse charge basis and not for tax payable on forward charge basis. Interest
payable is given as below:
IGST: 18,000 * 18% * 60/365 = 533 (rounded off)
CGST: 32,000 * 18% * 60/365 = 947 (rounded off)
SGST: 32,000 * 18% * 60/365 = 947 (rounded off)
(b) Computation of aggregate turnover of M/s Avkash Enterprises for the FY
Particulars `
Supply of diesel on which Sales Tax (VAT) is levied by Rajasthan 1,00,000
Government [Note-1]

8
 Supply of goods, after the completion of job work, from the place Nil
of Avkash Enterprises, directly by the principal [Note-2]
Export supply to England [Note-3] 5,00,000
Supply to its own additional place of business in Rajasthan 1 Nil
[Note-4]
Outward supply of services on which GST is to be paid by recipient 1,00,000
under reverse charge [Note-5]
Aggregate turnover 7,00,000
Notes:-
1. As per section 2(47) of the CGST Act, 2017, exempt supply includes non-
taxable supply. Thus, supply of diesel, being a non-taxable supply, is an
exempt supply and exempt supply is specifically includible in aggregate
turnover in terms of section 2(6) of the CGST Act, 2017.
2. Supply of goods after completion of job work by a principal by declaring the
place of business of job worker its additional place of business shall be
treated as the supply of goods by the principal in terms of explanation (ii)
to section 22 of the CGST Act, 2017.
3. Export supplies are specifically includible in the aggregate turnover in
terms of section 2(6) of the CGST Act, 2017.
4. Supply made without consideration to units within the same State is a not
a supply and hence not includible in aggregate turnover.
5. Outward supplies taxable under reverse charge would be part of the
“aggregate turnover” of the supplier of such supplies. Such turnover is not
included as turnover in the hands of recipient.
As per section 22 of the CGST Act, 2017 read with Notification No. 10/2019 CT
dated 07.03.2019, a supplier is liable to be registered in the State/ Union territory
from where he makes a taxable supply of goods and/or services, if his aggregate
turnover in a financial year exceeds the threshold limit. The threshold limit for a
person making exclusive intra-State taxable supplies of goods is as under:-
(i) ` 10 lakh for the States of Mizoram, Tripura, Manipur and Nagaland.

9
 (ii) ` 20 lakh for the States of Arunachal Pradesh, Meghalaya, Puducherry,
Sikkim, Telangana and Uttarakhand.
(iii) ` 40 lakh for rest of India.
The threshold limit for a person making exclusive taxable supply of services or
supply of both goods and services is as under:-
(i) ` 10 lakh for the States of Mizoram, Tripura, Manipur and Nagaland.
(ii) ` 20 lakh for the rest of India.
The applicable turnover limit for registration, in the given case, will be ` 20 lakh
as Rajasthan is not a Special Category State and M/s. Avkash Enterprises is
engaged in supply of goods and services. Although, the aggregate turnover of
M/s Avkash Enterprises does not exceed ` 20 lakh, it is compulsorily required to
register in terms of section 24(i) of the CGST Act, 2017 irrespective of the turnover
limit as it is engaged in making inter-State supply of goods in the form of exports
to England.
(c) Computation of total duties payable under the Customs Act
S. Particulars (`)
No.
1 Landed price 25,00,000
2 Add: Basic customs duty @ 10% 2,50,000
3 Add: Safeguard duty @ 30% on ` 25,00,000 7,50,000
4 Add: Social welfare surcharge (SWS) @ 10 % on 25,000
` 2,50,000 [While calculating SWS, safeguard
duty is excluded]
5 Add: Integrated tax 4,23,000
12% of ` 35,25,000 (` 25,00,000 + ` 2,50,000 +
` 7,50,000 + ` 25,000)
[Integrated tax is levied on the sum total of
the assessable value of the imported goods,
customs duties and applicable SWS]
6 Total customs duties and tax payable 14,48,000
[` 2,50,000 + ` 7,50,000 + ` 25,000 + ` 4,23,000]

10
5. (a) (i) Failure to pay any amount collected as tax beyond 3 months from due date
of payment is a specified offence as per clause (d) of Section 132(1) of the
CGST Act, 2017.
In the present case, failure to deposit the tax ` 4 lakh (` 245 lakh –
` 241 lakh). As the amount of failure does not exceed ` 200 lakh therefore,
failure to deposit ` 4 lakh collected as tax by Makkhanlal’ will not be
punishable with imprisonment as per section 132(1) of the CGST Act, 2017.
Further, falsification of financial records by ‘Makkhanlal’ is a specified
offence as per section 132(1)(d) and punishable with imprisonment upto 6
months or with fine or both as per clause (iv) of section 132(1) assuming
that falsification of records is with an intention to evade payment of tax due
under the CGST Act, 2017 and the said offence is bailable in terms of
section 132(4).
(ii) Failure to pay any amount collected as tax beyond 3 months from due date
is punishable with imprisonment upto 5 years and with fine, if the amount
of tax evaded exceeds ` 500 lakh in terms of section 132(1)(d) read with
clause (i) of section 132(1) of the CGST Act, 2017.
Since the amount of tax evaded by ‘Kishore’ exceeds ` 500 lakh (` 550
lakh -` 30 lakh), ‘Kishore’ is punishable with an imprisonment for a term
which may extend to 5 years and with fine. It has been assumed that
amount of ` 520 lakh collected as tax is not paid to the Government beyond
3 months from the due date of payment of tax.
Such offence is non-bailable in terms of section 132(5) of the CGST
Act, 2017.
If ‘Makkhanlal’ and ‘Kishore’ repeat the offence, they shall be punishable
for second and for every subsequent offence with imprisonment upto 5
years and with fine in terms of section 132(2) of the CGST Act, 2017.
Such imprisonment shall also be of at least 6 months in the absence of
special and adequate reasons to the contrary to be recorded in the
judgment of the Court.
(b) Section 107(6) of the CGST Act, 2017 read with section 20 of the IGST Act
provides that no appeal shall be filed with the Appellate Authority unless the
applicant has paid in full, such part of the amount of tax, interest, fine, fee and

11
penalty arising from the impugned order, as is admitted by him and a sum equal
to 10% of the remaining amount of tax in dispute arising from the said order
subject to a maximum of ` 50 crore. Thus, the amount of pre-deposit for filing an
appeal with Appellate Authority cannot exceed ` 50 crore (for tax in dispute) where
IGST demand is involved.

In the given case, the amount of pre-deposit for filing an appeal with the Appellate
Authority against the order of Joint Commissioner, where entire amount of tax is
in dispute, is:
(i) ` 28 crore [10% of the amount of tax in dispute, viz. ` 280 crore]
or
(ii) ` 50 crore,
whichever is less.
= ` 28 crore.
Further, section 112(8) of the CGST Act, 2017 provides that no appeal shall be
filed with the Appellate Tribunal unless the applicant has paid in full, such part of
the amount of tax, interest, fine, fee and penalty arising from the impugned order,
as is admitted by him and a sum equal to 20% of the remaining amount of tax in
dispute, in addition to the amount paid as pre-deposit while filing appeal to the
Appellate Authority, arising from the said order subject to a maximum of ` 100
crores.
Thus, in the given case, the amount of pre-deposit for filing an appeal with the
Appellate Tribunal against the order of the Appellate Authority, where entire
amount of tax is in dispute, is:
(i) ` 56 crores [20% of the amount of tax in dispute, viz. 280 crores]
or
(ii) ` 100 crores,
whichever is less.
= ` 56 crores.

12
 (c) The Government may by notification under section 25 of the Customs Act, 1962
prescribe preferential rate of duty in respect of imports from certain preferential
areas. The importer will have to fulfill the following conditions to make the
imported goods eligible for preferential rate of duty:
(i) At the time of importation, he should make a specific claim for the
preferential rate.
(ii) He should also claim that the goods are produced or manufactured in such
preferential area.
(iii) The area should be notified under section 4(3) of the Customs Tariff Act,
1975 to be a preferential area.
(iv) The origin of the goods shall be determined in accordance with the rules
made under section 4(2) of the Customs Tariff Act, 1975.
6. (a) The provisions relating to liability for GST in case of company in liquidation
provided under section 88 of the CGST Act, 2017 are:-
 Where any company is being wound up whether under the orders of a court
or Tribunal or otherwise, every person appointed as a liquidator/receiver of
assets of a company shall give the intimation of his appointment to the
Commissioner within 30 days of his appointment.
 The Commissioner shall ascertain the amount which in the opinion of the
Commissioner would be sufficient to provide for any tax, interest or penalty
which is then, or is likely thereafter to become, payable by the company.
 He shall communicate the details of amount to the liquidator within 3
months of the receipt of intimation of appointment of liquidator.
 When any private company is wound up and any tax, interest or penalty
determined under the CGST Act on the company for any period, whether
before or in the course of or after its liquidation, cannot be recovered, then
every person who was a director of such company at any time during the
period for which the tax was due shall, jointly and severally, be liable for
the payment of such tax, interest or penalty.
However, director shall not be liable if he proves to the satisfaction of the
Commissioner that the non-recovery cannot be attributed to any gross neglect,
misfeasance or breach of duty on his part in relation to the affairs of the company.

13
(b) Section 161 of the CGST Act, 2017 lays down that any authority, who has passed
or issued any decision or order or notice or certificate or any other document, may
rectify any error which is apparent on the face of record in such decision or order
or notice or certificate or any other document, either on its own motion or where
such error is brought to its notice by any GST officer or by the affected person
within a period of three months from the date of issue of such decision or order or
notice or certificate or any other document, as the case may be.
However, no such rectification shall be made after a period of six months from the
date of issue of such decision or order or notice or certificate or any other
document. Further, the said period of six months shall not apply in such cases
where the rectification is purely in the nature of correction of a clerical or
arithmetical error, arising from any accidental slip or omission.
Principles of natural justice should be followed by the authority carrying out such
rectification, if it adversely affects any person.
OR
Alternative Answer
(b) In accordance with section 81 of the CGST Act, 2017, where a person, after any
amount has become due from him, creates a charge on or parts with the property
belonging to him or in his possession by way of sale, mortgage, exchange, or any
other mode of transfer whatsoever of any of his properties in favour of any other
person with the intention of defrauding the Government revenue, such charge or
transfer shall be void as against any claim in respect of any tax or any other sum
payable by the said person.
However, such charge or transfer shall not be void if it is made for adequate
consideration, in good faith and without notice of the pendency of such
proceedings under this Act or without notice of such tax or other sum payable by
the said person, or with the previous permission of the proper officer.
(c) In both DFIA and Advance Authorization schemes, import of inputs, oil and
catalyst which are consumed/ utilised in the process of production of export
product are permitted without payment of customs duty. Validity period for both
the schemes is 12 months from the date of issue.

14
Key differences between DFIA and Advance Authorisation schemes are as
follows-
(i) ‘Advance Authorisation’ is not transferable. DFIA is transferable after
export obligation is fulfilled.
(ii) Advance Authorisation scheme requires 15% value addition, while in case
of DFIA, minimum 20% value addition is required.
(iii) Advance Authorisation and / or material imported under Advance
Authorisation is subject to ‘Actual User’ condition. No DFIA shall be issued
for an input which is subject to pre-import condition or where SION
prescribes ‘Actual User’ condition or certain other specified inputs with pre
import condition.
(iv) DFIA cannot be issued where SION (Standard Input Output Norms)
prescribes actual user condition [as the material is transferable after
fulfilment of export obligation]. Advance Authorisation can be issued even
if SION for that product is not fixed. DFIA can be issued only if SION has
been fixed for that product to be exported.
(v) Duty Free Import Authorisation shall be exempted only from payment of
Basic Customs Duty (BCD). Drawback as per rate determined and fixed by
Customs authority shall be available for duty paid inputs, whether imported
or indigenous, used in the export product. Imports under Advance
Authorisation are exempted from payment of Basic Customs duty,
Additional Customs duty, Education cess, Anti- dumping duty,
Countervailing duty, Safeguard duty and Transition Product Specific
Safeguard duty, wherever applicable.
However, specified deemed exports are not exempted from payment of applicable
anti-dumping duty, countervailing duty, safeguard duty and transition product
specific safeguard duty, if any. Imports under Advance Authorisation for physical
as well as deemed exports are also exempt from whole of the Integrated Tax and
Compensation Cess.

15
 Mock Test Paper - Series I: March 2025
Date of Paper: 21st March 2025
Time of Paper: 2 P.M. – 6 P.M.

FINAL COURSE: GROUP – II

PAPER – 6: INTEGRATED BUSINESS SOLUTIONS
SUGGESTED ANSWERS

ANSWERS TO THE CASE STUDY 1

Answers to the Multiple Choice Questions

1. (a) Low end disruption.
Reason: B3D is targeting low-income customer segment currently existing in the
real estate market by offering them affordable homes using innovative 3D
technology at highly attractive rates that cannot be matched by incumbents.
Hence, it plans to enter the market at the lower priced product segment.
Incumbents due to their inability to compete with the company, are expected to
concentrate their business on higher end segments for middle income and luxury
class segments.
Also, disruptive innovation is of two type low end disruption and new market
disruption.
2. (c) Start up stage with product-market FIT stage
Reason: B3D is in the start up stage with product-market FIT stage. Getting
regulator approvals, arranging for operational requirements in terms of men,
machines and money, strategic tie-ups that will help its reach in the market,
ongoing research and development activities to reduce costs of operations. All
this indicates a commitment from B3D to get customer validation for the 3D
affordable housing project that it wants to the market. Its offering will be tested in
the market through its first project in Pune, where customer demand is expected
to be generated and the value proposition starts generating cash flow, the
company moves to the start – up stage with product-market FIT of its value
proposition.
3. (d) Inventory to stock for construction materials like cement and steel while Just in
Time purchasing for materials like bricks and glass.

1
 Reason: Inventory to stock for construction materials like cement and steel. B3D
wants the materials to be of specific quality grade. It also seems from the scenario,
that the company may not be able to have sufficient negotiating power with the
suppliers. Also, the lead time for procurement of material is uncertain. Hence, the
ideal method would be the stock these inventories.
Just in Time purchasing will work well where the construction material like bricks
and glass are very fragile and difficult to store. These materials can be procured
only when needed in order to avoid loss due to storage due to their fragility. Loss
will be incurred if the inventory is stocked and stored due to their fragility. It is
given that These materials are widely available in the market with many suppliers
and can be procured easily on demand. Hence, Just In Time purchasing
requirements would be an ideal method for these inventories.
4. (b) ` 2.60 crores. Calculation as below
Reason:
PV of Cash Inflows =
(`1 crore)×0.95 (`2 crore)×0.90 (`2 crore)×0.85 (`3 crore)×0.80 (`2 crore)×0.75
1 + 2 + 3 + 4 + 5
(1.03) (1.03) (1.03) (1.03) (1.03)
= ` 92,23,301 + ` 1,69,66,726 + ` 1,55,57,408 + ` 2,13,23,689 + ` 1,29,39,132
= ` 7,60,10,256
NPV = PV of Cash Inflows – Initial Investment
= ` 7,60,10,256 - ` 5,00,00,000 = ` 2,60,10,256 that is ` 2.60 crores.
5. (d) Lease component ` 5,60,000 per annum and non lease component ` 1,40,000
per annum
Reason: The stand alone price for the lease component represents 80% of the
total estimated stand alone prices [` 8,00,000/` 10,00,000]. Therefore, B3D
allocates the consideration in the contract i.e. ` 7,00,000 per annum as follows:
Lease component for 3D printer ` 5,60,000 per annum
80% × ` 7,00,000 per annum
Maintenance component for 3D printer ` 1,40,000 per annum
20% × ` 7,00,000 per annum
Total payment made to AK Enterprises ` 7,00,000 per annum
Answers to the Descriptive Questions
6. In the given case, BharatTech3D (B3D) (Indian company) took technical services of
Pathway Consulting GMBH (German based company) of ` 25 lakhs in December 2024.

2
It deducted the tax at source but failed to deposit to the Government. Later, it deposited
the TDS with the Government in December 2025.
Disallowance of Expense under Section 40(a)(i):-
As per Section 40(a)(i) of the Income Tax Act, 1961, if an assessee deducted tax at
source (TDS) on payment of fees for technical services to a non-resident but failed to
pay the same on or before due date of filing return of income, then such expenditure shall
be disallowed in the previous year. As per the first proviso to Section 40(a)(i), if tax
has been deducted during the previous year but paid after due date of filing return of
income, then the expense will be allowed in the year in which such tax is paid.
In the given case, since BharatTech3D (B3D) deducted tax but did not deposit it on or
before the due date, the fees for technical services of `25 lakhs will be disallowed while
computing business income for the Financial Year 2024-25 (A.Y. 2025-26). Since tax is
paid in December 2025, the expense of `25 lakhs will be allowed as a deduction in the
Financial Year 2025-26 (A.Y. 2026-27).
Determination of TDS Amount :-
As per Section 195, any person responsible for paying interest (other than interest
referred to in section 194LB or section 194LC) or any other sum chargeable to tax (other
than salaries) to a non-corporate non-resident or to a foreign company is liable to deduct
tax at source at the rates in force. Applicable rate of tax on such FTS is 20%. However,
if DTAA provides for a rate lower than 20%, then, provisions of DTAA would apply.
The applicable TDS rate (assuming it qualifies as "fees for technical services" and DTAA
benefit is considered) shall be 10% + surcharge (if applicable) + 4% cess.
TDS @10% on `25,00,000 = `2,50,000
HEC @4% on `2,50,000 = `10,000
So, the total TDS Amount shall be `2,60,000
Interest Calculation under Section 201(1A) :-
Section 201(1A) imposes interest on delayed TDS payment as follows:
Interest for Delay in Deposit (1.5% per month or part thereof)
TDS was deducted on 31st December 2024 but deposited in December 2025
Delay = 12 months
Interest = 1.5% per month × 12 months × `2,60,000
Interest = `46,800

3
7. Osterwalder’s Business Model Canvas comprises of nine elements, wherein four
elements pertain to cost (key partners, key activities, key resources and cost structure).
These are connected to the other four elements pertaining to revenue (customer
relationships, channels, customer segments and revenue streams). This link is
established through the nineth segment, value proposition.
Key Partners:
B3D relies on several key partners to support its operations and growth in the
construction industry. This includes suppliers of essential components such as 3D
construction printing machines, specialized cement, and steel required for 3D printers,
as well as other construction materials like bricks and glass. Suppliers of construction
labour are also crucial partners in executing projects efficiently.
Furthermore, B3D has formed a strategic tie-up with banks like Smart Bank Ltd. This
partnership enhances market reach by facilitating easier access to financing for potential
customers. Additionally, consulting firms providing technical insights on the latest
developments in construction technology play a vital role in B3D's innovation and
continuous improvement efforts.
Key Activities:
B3D engages in several key activities to drive its business and innovation in the
construction industry. First and foremost, it meticulously follows advanced construction
techniques, coordinating the necessary manpower, materials, and machinery to
complete projects within a swift 6-month timeframe. This efficient project management
ensures timely delivery and customer satisfaction.
Secondly, B3D places a strong emphasis on ensuring that construction materials meet
the required specifications and quality standards necessary to support 3D printing
technology. This commitment to quality enhances the durability and efficiency of its
construction processes.
Additionally, B3D invests significantly in research and development activities to
maintain a competitive edge. These efforts focus on innovation in 3D printing
technology and construction methodologies, enabling B3D to stay ahead in the market
and continuously improve its offerings.
To facilitate quick inventory turnover and boost sales, B3D employs targeted
advertisements and leverages its strategic partnership with Smart Bank Ltd. This
collaboration not only expands its customer reach but also facilitates easy financing
options for potential buyers, thereby accelerating sales and project timelines.
Moreover, B3D evaluates the creditworthiness of customers interested in outright
purchases and actively encourages the use of home loans through Smart Bank Ltd. This
approach ensures that financing solutions are accessible to a broader customer base,
making homeownership more achievable for low-income segments.

4
Key Resources:
B3D relies on key resources essential for its operations and innovation in the construction
sector. At the core of its technological advancement are 3D construction printers, which
enable efficient and precise construction of residential units. These printers are pivotal
in realizing B3D's goal of delivering high-quality, affordable housing using advanced
technology.
Another critical resource for B3D is its team of employees specialized in engineering
and architecture. These professionals bring expertise in designing and overseeing the
implementation of 3D printing technology in construction projects. Their skills and
knowledge are crucial for maintaining operational excellence and driving continuous
improvement.
In addition to tangible resources like 3D printers and skilled personnel, B3D leverages
intangible assets such as patents and process improvements generated through its
research and development activities. These intangible assets not only protect B3D's
innovations but also provide a competitive edge in the market by enhancing efficiency,
reducing costs, and improving the quality of its construction projects.
Value Proposition of B3D:
B3D addresses the pressing customer problem of the lack of good quality, affordable
housing facilities in urban cities in India. By leveraging 3D construction printing
technology and other innovative technological solutions, B3D provides secure and
affordable housing facilities, revolutionizing the construction industry and meeting the
urgent needs of low-income customers in these urban centers.
Customer Relationships:
B3D maintains customer relationships by managing a mass customer base through sales
offices at each project site. These offices conduct site tours and handle queries about
the novel 3D construction project, ensuring that potential buyers are well-informed and
engaged throughout the purchasing process.
Channels:
B3D utilizes multiple channels to reach its customers effectively. Sales offices are
established at each project site to directly engage with potential buyers. Additionally,
B3D leverages its tie-up with Smart Bank Ltd., which publicizes the projects through
digital marketing activities and direct selling agents, ensuring wide reach and visibility
among potential customers.
Customer Segments:
B3D targets lower-income customers in urban cities across India who are in need of
affordable housing facilities. The customer base consists of two types: those making
outright purchases and those requiring financial assistance for home purchases.

5
 Revenue Streams:
B3D's primary revenue stream comes from the sale of residential units, with a uniform
selling price of ` 10 lakh per single bedroom flat and ` 12 lakh per double bedroom flat
to popularize the scheme. There is flexibility to adjust prices upward based on cost
considerations for each project across multiple cities, with a target profitability of 8% of
the sale price of each flat.
In addition to direct sales revenue, B3D generates ancillary income through
commissions from its partnership with Smart Bank Ltd. This collaboration facilitates loan
approvals for customers, enhancing affordability and enabling quicker sales turnover.
This dual revenue model ensures that B3D not only meets the housing needs of lower-
income segments but also maximizes its financial performance through strategic pricing
and financial partnerships.
Cost Structure:
B3D's cost structure involves various management opportunities and challenges. On the
opportunity side, utilizing 3D construction technology yields higher quality construction
while reducing waste, errors, and time due to automated processes. This efficiency
allows for better inventory management of materials like cement, steel, bricks, and glass,
and decreases construction time, lowering labor costs by almost 40% and reducing
overhead expenses. However, B3D faces several challenges, including high land
acquisition costs, significant expenses for 3D printing machines, and the need for higher
remuneration for skilled employees such as engineers and architects. Additionally, the
specialized materials required for 3D printing are costly, inflation impacts other
construction costs, and financing costs remain high.
8. Ind AS 38 ‘Intangible Assets’ requires an intangible asset to be recognized if, and only
if, certain criteria are met.
♦ Intention to complete the asset is apparent as it is a major project with full support
from board
♦ Finance is available as resources are focused on project
♦ Costs can be reliably measured
♦ Benefits are expected to exceed costs – (in 3 years)
♦ Regulatory approval which was received on June 1, 2023
Regulatory approval for the project was received on June 1, 2023. The project was
completed on April 30, 2024. Costs of ` 24,00,000 incurred until March 31, 2024 have
been recognized as an intangible asset. This is incorrect.

6
Expenses incurred prior to June 1, 2023 should be expensed out. Assuming that
`24,00,000 has been incurred evenly from 1st April 2023, ` 4,00,000 has been charged
to Profit and Loss account. Retrospective recognition of expense as an asset is not
allowed.
Expenses incurred between June 1, 2023 and March 31, 2024 should be capitalized:
` 24,00,000×10/12 = ` 20,00,000
Ind AS 36 ‘Impairment of assets’ requires an intangible asset not yet available for use to
be tested for impairment annually. As of March 31, 2024 the asset is not yet available for
use, hence it has to be tested for impairment. Cash flow of ` 19,00,000 in perpetuity
would clearly have a present value in excess of ` 19,00,000 and hence there would be
no impairment. However, the research head Mrs. Sinha is technically qualified, so
impairment tests should be based on her estimate of a five-year remaining life and so
present value of the future cost savings of ` 18,00,000 should be considered in that case.
` 18,00,000 is greater than the offer received (fair value less cost to sell) of ` 17,00,000
and so ` 18,00,000 should be used as the recoverable amount.
The carrying amount should be consequently reduced to ` 18,00,000.
Calculation of Impairment loss of intangible asset under development:
Particulars Amount (`)
Carrying amount of intangible asset as of March 31,2024 20,00,000
Less Recoverable amount (18,00,000)
Impairment loss 2,00,000
Impairment loss of ` 2,00,000 is to be recognized in the profit and loss for the
year 2023-24.
Necessary adjusting entry to correct books of account will be:
Particulars ` `
Operating expenditure – Development expenditure Dr 4,00,000
Operating expenses – Impairment loss Dr 2,00,000
To Intangible asset under development 6,00,000

7
 ANSWERS TO THE CASE STUDY 2

Answers to the Multiple Choice Questions

1. (c) Funding by angel investors
Reason: Angel investors typically use their own money. Often, they are among
an entrepreneur’s family and friends. They generally invest in small-start-ups and
are attached to the idea of the business floated by start-up. However, venture
capitalists take care of pooled money from other investors and place them in a
strategically managed fund. Bootstrapping is an attempt to build the company from
personal finances or from operating revenues of the company. Factoring is a
method of bootstrapping.
2. (b) Company is eligible to deduction @ 100% of its profits from eligible business for
any 3 consecutive assessment years out of 10 years beginning from the year in
which start-up is incorporated. Further, certificate of eligible business in this
regard is provided by Inter-Ministerial Board for Certification.
Reason: Under section 80-IAC (1) of Income tax act, 1961, where the gross total
income of an assessee, being an eligible start- up, includes any profits and gains
derived from eligible business, there shall, in accordance with and subject to the
provisions of this section, be allowed, in computing the total income of the
assessee, a deduction of an amount equal to one hundred per cent of the profits
and gains derived from such business for three consecutive assessment years.
The deduction may at the option of the assessee, be claimed by him for any three
consecutive assessment years out of ten years beginning from the year in which
the eligible start-up is incorporated.
Further, explanation to section 80-IAC also defines eligible start-up which fulfils
the following conditions namely: -

(a) it is incorporated on or after the 1st day of April, 2016 but before the 1st
day of April, 2024
(b) the total turnover of its business does not exceed one hundred crore rupees
in the previous year relevant to the assessment year for which deduction
under sub-section (1) is claimed and

8
 (c) it holds a certificate of eligible business from the Inter-Ministerial Board of
Certification as notified in the Official Gazette by the Central Government
3. (c) The company is an eligible start-up holding certificate of eligible business.
However, such start-up is allowed to defer withholding tax when option is
exercised and shares are allotted to Mr. X. It is deducted in required manner after
expiry of certain timelines and/ or happening of certain events
Reason: Under section 192(1C), a person, being an eligible start-up referred to
in section 80-IAC, responsible for paying any income to the assessee being
perquisite of the nature specified in sub clause (vi) of sub-section (2) of section
17 in any previous year relevant to the assessment year, shall deduct or pay, as
the case may be, tax on such income within fourteen days—
(i) after the expiry of forty-eight months from the end of the relevant
assessment year or
(ii) from the date of the sale of such specified security or sweat equity share
by the assessee or
(iii) from the date of the assessee ceasing to be the employee of the person
whichever is the earliest, on the basis of rates in force for the financial year in
which the said specified security or sweat equity share is allotted or transferred.
Therefore, section 192(IC) provides for deferment of withholding tax in case of
eligible start-ups.
4. (c) It involves giving notice of proposed scheme to Registrar and Official Liquidators
and approval of scheme by both the companies. After approval of scheme by
creditors, the scheme is filed with Regional Director, Registrar and Official
Liquidators. The scheme is finally registered by Regional Director.
Reason: In case of merger between small companies/ start-ups, fast track
procedure for merger has been prescribed under section 233 of Companies Act,
2013. It does not require filing of application with NCLT. The notices are to be
given to registrar, official liquidator and Central Govt (powers delegated to
Regional Director). After considering objections of registrar and official liquidator,
the scheme is finally registered by Regional Director.

9
5. (a) Past performance indicators
Reason: In valuation of a start-up like Agrofine, there is no historical data on basis
of which future projections can be drawn. Valuation of a start-up entirely rests on
its future growth potential. The assessments of future growth are dependent upon
competence and drive of persons running the business.
Answers to the Descriptive Questions
6. Value as on 31st March, 2023

Original cost ` 3,00,000

Less: Amortisation (3,00,000 x 1/5) (` 60,000)
Net Value ` 2,40,000
Value as on 31st March, 2024
On 1st April, 2023, the downward revaluation is recorded by writing down the asset to the
estimated value of ` 1,50,000, which necessitates a ` 90,000 charge to profit & loss
(carrying value, ` 2,40,000 less fair value ` 1,50,000).
Amortisation provided for the financial year 2023-2024 is ` 75,000 (` 1,50,000 / 2)
Net value is = ` 1,50,000 – ` 75,000 = ` 75,000.

Value as on 31st March, 2025

As of 1st April, 2024, the carrying value of the patent is ` 75,000. Revalued amount of
patent is ` 3,00,000.

Out of total revaluation gain of ` 2,25,000, ` 90,000 will be charged to profit & loss and
balance amount of ` 1,35,000 (` 2,25,000 – ` 90,000) will be credited to revaluation
reserve in OCI.

Amortisation provided for the financial year 2024-2025 is ` 75,000 (`3,00,000 / 4)

Net value as on 31st March, 2025 = ` 3,00,000 – ` 75,000 = ` 2,25,000.
7. Start-up Agrofine, like many early-stage businesses, can seek funding from venture
capital (VC) firms to meet its business requirements. Venture capital funding typically
progresses through the following stages:-

10
Seed Money is the initial funding required to support the development of a concept, idea,
or research and development (R&D) for product creation. At this stage, the risk is
extreme, as the business is still in its conceptual phase, making the likelihood of failure
very high. Investors typically commit funds for a long-term horizon of 7 to 10 years.
Start-Up Funding is provided to early-stage businesses that need financial support to
develop prototypes, initiate operations, and begin marketing efforts. The risk remains
very high since the business has yet to establish market acceptance or generate revenue.
Investment at this stage usually spans 5 to 9 years.
First-Round Funding is directed toward businesses that have started commercial
production and marketing but require additional financial support to sustain operations.
The risk is still high as the company is in its early revenue-generating phase but has not
yet achieved financial stability. Investments at this stage generally range from 3 to 7
years.
Second-Round Funding is intended for companies looking to expand their market
reach, meet growing operational needs, and scale their business, although they have not
yet achieved profitability. The risk at this stage is sufficiently high, as the company is
generating revenue but has not yet reached a break-even point. Investors typically
commit funds for a period of 3 to 5 years.
Third-Round Funding (Mezzanine Financing) is used for market expansion,
acquisitions, or product development in companies that have started generating profits.
The risk level at this stage is moderate, as the business model has been proven, but
financial support is still required for large-scale growth. The investment horizon for this
round is usually between 1 and 3 years.

Fourth-Round Funding (Bridge Financing) is designed to help companies transition to

the public market by financing their Initial Public Offering (IPO) preparations. At this
stage, the risk is relatively low, as the company is already established, generating profits,
and preparing to go public. Investments in this phase generally last between 1 and 3
years.
Each funding stage carries a different level of risk, with the highest uncertainty in the
seed and start-up phases, gradually decreasing as the company matures and moves
toward an IPO.

11
Alternative Solution:
Stages of funding for VC

1. Seed Money: Low level financing needed to prove a new idea.

2. Start-up: Early-stage firms that need funding for expenses associated with
marketing and product development.

3. First-Round: Early sales and manufacturing funds.

4. Second-Round: Working capital for early stage companies that are selling
product, but not yet turning in a profit.

5. Third Round: Also called Mezzanine financing, this is expansion money for a
newly profitable company.
6. Fourth-Round: Also called bridge financing, it is intended to finance the "going
public" process.
Risk in different stages is given below:

Financial Period (Funds Risk Activity to be financed

Stage locked in Perception
years)
Seed Money 7-10 Extreme For supporting a concept or idea
or R&D for product development
and involves low level of
financing.
Start Up 5-9 Very High Initializing prototypes operations
or developing products and its
marketing.
First Stage 3-7 High Started commercial production
and marketing.
Second Stage 3-5 Sufficiently Expanding market and growing
high working capital needs though not
earning profit.
Third Stage 1-3 Medium Market expansion, acquisition &
product development for a profit
making company. Also called
Mezzanine Financing.

12
 Fourth Stage 1-3 Low Facilitating public issue i.e. going
public. Also called Bridge
Financing.

8. (i) Calculation of total labour cost :-

Cumulative Average Time for 256 equipments = 48.43 hrs. [112.50 × (0.908)]
Total Time for 256 equipments = 12,398.08 hrs. [48.43 hrs.× 256 equipments]
Total Labour Cost of 256 equipments = 2,47,961.60 [12,398.08 hrs.× 20]
(ii) Calculation of revised labour cost at zero profit and cumulative average time
(revised) :-
Revised Labour Cost for zero profit = 3,22,961.60 [2,47,961.60 + 75,000]
Total Time for 256 equipments (Revised) = 16,148.08 hrs. [3,22,961.60 / 20]
Cumulative Average Time for 256 equipments (Revised) = 63.08 hrs.
[16,148.08 / 256]

13
 ANSWERS TO THE CASE STUDY 3

Answers to the Multiple Choice Questions

1. (a) Statements (i) and (iii) are true.
Reason: Statement (i) the successful marketing campaign by SAL that reached
out directly to customers had resulted in a higher than anticipated sales volume.
This would have put pressure on procurement and production systems to cater to
this demand immediately. Due to JIT systems, they do not hold any stock to meet
sudden spike in demand. Statement (iii) where the production department has to
plan the annual production schedule based on demand forecasts. This will allow
them to co-ordinate with procurement suppliers who provide raw material in order
to operate smoothly. Any unexpected seasonal demand spike due cannot be
foreseen, in which case JIT production system may not be suitable.
Statement (ii) is incorrect as Mr. Ray is in charge on only sale of the 3 grades of
fertilizers and is not in charge of any other function or operation in the
manufacturing process. Hence, he cannot be held accountable for the sudden
increase in raw material prices which has led to decrease in actual contribution.
Statement (iv) is incorrect as JIT procurement and production system can function
independent of each other. Raw material can be stocked while production can
follow JIT system. Similarly, raw material can be procured on a JIT system while
production can be made to stock.
2. (c) (i) and (iii)
Reason: Statements (i) and (iii) are considerations that the auditors of SAL and
PAL need to consider for their audits of financial statements.
Statements (ii): Incorrect. Even if explicitly banned, the auditor's responsibility for
considering compliance remains.
Statement (iv): Incorrect. While evaluating the implications of non-compliance is
important, it's not the primary responsibility of the auditor in this specific context.
3. (d) Grade 1 only as that is the only product that is both price sensitive as well
as has the capability of yielding positive contribution due to high margins.
Reason: Grade 1 only as the increase in volume was 25% for a 10% discount
offered on the price and it contributed positively as the net contribution is ` 130.
As a high margin product, it could buffer any unexpected cost escalation.

14
 Grade 1 Grade 2 Grade 3
Reduction in selling price per kg 50 20 20
Reduction in selling price % 10% 7% 10%
Increase in sales (in kgs) 500 100 400
Increase in sales in % 25.00% 3.33% 8.00%
Net contribution per kg (actual) 130 60 -

While Grade 3 can be considered as price sensitive using the 5% threshold limit,
the actual net contribution per kg was nil. Hence, it might not be prudent to offer
much discount for Grade 3, being a lower margin product. Similarly, Grade 2 is
also less price sensitive using the 5% threshold limit. Here a 7% discount in selling
price resulted in only a 3.33% increase in sales volume. Hence, Grade 2 sales will
not necessarily increase much by price discounts alone.
4. (b) The takeover of UUL by SAL is invalid as even after the Tribunal dismissed
the application made by the dissenting shareholders, UUL acquired the
shares of only 5% out of the total 8% dissenting shareholders.
Reason: In the given case, since the application made by the dissenting
shareholders has been dismissed by the Tribunal, SAL was bound to acquire all
the shares of the dissenting shareholders i.e. the entire 8% shareholding. Since
SAL acquired only 5% shareholding of the dissenting shareholders, this is in
contravention to Section 235 of the Companies Act, 2013. Hence the takeover of
UUL by SAL is invalid.
5. (c) The income does not qualify as agricultural income and is taxable as
business income under "Profits and Gains of Business or Profession,"
despite acquiring agricultural land.
Reason: Under Section 2(1A) of the Income Tax Act, 1961, Agricultural income
in India primarily encompasses earnings derived from activities related to farming.
This includes income generated from renting out agricultural land, cultivating and
selling crops, processing agricultural produce for market (such as drying,
cleaning, or simple processing), and income earned from farm buildings essential
for agricultural operations.
Merely acquiring land to promote awareness or conduct demonstrations does not
convert income from fertilizer sales into agricultural income. Land acquired by SAL
is being used to promote awareness and conduct demonstrations about their
applications of customized micronutrient mixture fertilizer. Farmers attending such
promotional events purchase fertilizers that are customized for the crop that it is

15
 required for. Sale of such fertilizers is not derived directly from any agricultural
activities on the land. Further, the case clearly mentions that no actual agricultural
production occurs on this land. Therefore, SAL’s sales from such fertilizers are
taxable as business income under "Profits and Gains of Business or Profession".
Answers to the Descriptive Questions
6 Accounting treatment as per IND AS 20, Accounting for Government Grants and
Disclosure of Government Assistance:
1. First Grant of ` 5 crore – research on “Soil degradation due to misuse of fertilizers”
The first grant for “Soil degradation due to misuse of fertilizers” involving research
into effects of excessive use of fertilizers on soil quality (acidification, hardening
and pollution) based on a specific area from a predominantly agricultural belt in
Punjab. Since, the grant is unconditional and no details regarding its refund have
been mentioned. Even though research has not started, nor major steps have
been completed by SAL to commence the research, yet the grant will be
immediately recognized in the profit and loss for the year ended March 31, 2025.
2. Second Grant of ` 5 crore - relates to the commercial development of crop-specific
nutrition solution that will provide each crop variety with specific nutrients that it
will need to grow. As per the information given in the case study, these solutions
will be available in the market by April 2026. Hence, by that time, grant relates to
the development of new technological solution (which is an asset) and should be
initially recognized as deferred income. The deferred income should be
recognized as income on a systematic and rational basis over the useful life of
this new technology.
For the grant received of ` 5 crores, SAL should recognize a liability in the balance
sheet as of March 31, 2025, and March 31,2026. Once the technology is used in
the commercial development of crop-specific nutrition, the deferred grant income
of ` 5 crores should be recognized over the useful life of this new technology to
compensate for depreciation costs.
Alternatively, as per Ind AS 20 SAL would be permitted to offset the deferred
income of ` 5 crores against the cost of development of this technology as at
April 1, 2026.
3. Earthquake related compensation – SAL will be able to submit an application form
only after May 31, 2025 i.e. in the F.Y. 2025-26. Although the earthquake
happened in September 2024 relating to the financial year 2024-25, SAL should
recognize the income from the government grant in the year the application is
submitted and approved by the government for compensation.

16
 Since in the F.Y. 2024-25, the application form could not be submitted due to
adoption of financials with respect to sales figure before earthquake occurred,
SAL should not recognize the grant income as it has not become receivable as at
March 31, 2025.
7. Reconciliation

Actual Contribution
` 5,11,000

Budgeted Cost Variances

Sales Variances
Contribution
` 1,69,000 (A) ` 2,20,000 (A)
` 9,00,000

Sales Contribution Sales Volume Material Price

Price Variance Variance Variance
` 2,95,000 (A) ` 1,26,000 (F) ` 2,20,000 (A)

Sales Contribution
Mix Variance
` 36,000 (F)

Sales Contribution
Quantity Variance
` 90,000 (F)

Budgeted vs. Actual Contribution

Referring to working notes, the total budgeted contribution for the year 2024-25 was
` 9,00,000 while the actual contribution was ` 5,11,000. There is hence an adverse
variance in terms of contribution = budgeted contribution – actual contribution
= ` 9,00,000 - ` 511,000 = ` 389,000 (Adverse).
The actual contribution for all three grades of fertilizers is lower than the budgeted
contribution. This is because of 2 reasons: Discount policy (b) Raw material procurement
cost. Now let us analyse the variances in detail.

17
Sales variances (in terms of contribution)
Sales variances in terms of contribution can be classified as sales contribution price
variance and sales contribution volume variance.
Sales contribution price variance is calculated as ` 2,95,000 (Adverse).

Sr. Sales Contribution Price Grade 1 Grade 2 Grade 3 Total

No. Variance
1 Actual Contribution (per kg) 150 80 20 -
* Based on standard cost [450-300*] [280-200*] [180-160*]
2 Standard Contribution (per 200 100 40 -
kg)
3 Actual Quantity (kg) 2,500 3,100 5,400 11,000
4 Sales Contribution Price (1,25,000) (62,000) (1,08,000) (2,95,000)
Variance =
(Actual Contribution –
Standard Contribution) ×
Actual Quantity [(1 - 2) × 3]

SAL’s sales and marketing campaign allowed for slightly higher discounts were given on
bulk purchases beyond a certain limit. This policy for additional discount was not factored
in the standard price (budget), resulting in a difference between actual and budgeted
contribution.
Sales contribution volume variance is calculated as ` 1,26,000 (Fav).
Sr. Sales Contribution Grade 1 Grade 2 Grade 3 Total
No. Volume Variance
1 Actual Quantity (kg) 2,500 3,100 5,400 11,000
2 Budget Quantity (kg) 2,000 3,000 5,000 10,000
3 Standard Contribution (per 200 100 40 -
kg)
4 Sales Contribution Volume 1,00,000 10,000 16,000 1,26,000
Variance =
(Actual Quantity - Budget
Quantity) × Standard
Contribution [(1 - 2) × 3]

This is another fundamental metric to assess sales performance. By comparing the actual
sales with the budget sales, the company can understand (a) market conditions in which

18
it operates (b) success of any sales and marketing campaigns or even (c) the
reasonableness of the company’s forecasting capabilities.
In the case of SAL, for the year 2024-25 the actual sales volume of 11,000 units has
been higher than the budgeted sales of 10,000 units. A possible reason for this could be
the spurt in demand due to its successful sales and marketing campaign for the three
new grades that were introduced. This resulted in a favourable variance of ` 1,26,000
for the year.
Sales variance in terms of contribution = Sales contribution price variance
` 2,95,000 (Adverse) + Sales contribution volume variance ` 1,26,000 (Favourable)
= ` 1,69,000 (Adverse).
This tallies with the overall results as explained above. It can be concluded that while
volumes helped buffer the fall, SAL may have given deeper discounts that eventually
impacted its profitability. For example, Grade 3 fertilizer, where the actual contribution is
nil. Although SAL sold 400 units more than budget of Grade 3 fertilizer, the contribution
towards actual profits was nil. This is equally due to discounts that were given as part of
the sales and marketing campaign (the impact of material price discussed later). SAL’s
sales team should realize that such discounts may be unfeasible in the long run. Price
sensitivity analysis of how the selling price of each grade impact demand is an exercise
the SAL’s team can undertake to understand how much discount to give in future.
Analysing sales contribution volume variance in depth
To analyse sales contribution volume variance better, it can be further split up as sales
contribution mix variance and sales contribution quantity variance.
Sales contribution mix variance is ` 36,000 Favourable.
Products Actual Actual Sales Difference Standard Mix Variance
Quantity in Budgeted AQ - RAQ Difference ×
(AQ) Contribution
Proportion Standard
per kg
(RAQ) Contribution

Grade 1 2,500 2,200 300 200 60,000

Grade 2 3,100 3,300 (200) 100 (20,000)

Grade 3 5,400 5,500 (100) 40 (4,000)

Total 11,000 11,000 - 36,000

Sales mix variance helps identify which product or product lines are performing well. As
per the budget proportion sales volume composition was Grade 1: 20%, Grade 2: 30%

19
and Grade 3: 50%. When applied to actual volume of 11,000 units, the distribution
appears in the column RAQ – Revised Actual Quantity. The difference between actual
quantity sold and the RAQ shows the variation in the mix / proportion of actual sales as
compared to the budgeted proportion.
Accordingly, Grade 1 has sold 300 units more, having a higher proportion in the mix. It
also has the highest contribution of ` 200 per kg as compared to the other 2 grades. This
swings the variance to a favourable side. On the contrary, Grade 2 and Grade 3 have a
lower proportion in the sales mix, contributing adversely to the sales mix ratio. Overall,
the sales mix is positive because SAL sold more of Grade 1 fertilizer which also has a
higher contribution as compared to the other 2 grades. Hence, it can be concluded the
Grade 1 trends better than the other grades and contributes better towards the
profitability of the business.
Sales contribution quantity variance is ` 90,000 Favourable.
Products Budget Actual Difference Standard Quantity
Quantity Quantity in RAQ - BQ Contribution Variance
(BQ) Budgeted per kg Difference ×
Proportion Standard
(RAQ) Contribution
Grade 1 2,000 2,200 200 200 40,000
Grade 2 3,000 3,300 300 100 30,000
Grade 3 5,000 5,500 500 40 20,000
Total 10,000 11,000 1,000 - 90,000

A favourable sales contribution quantity variance indicates by how much the contribution
has risen exclusively on account of actual sales in a predetermined proportion (i.e.
budgeted) being higher than expectations as per budget. This does not consider any
impact on account of variation in sale price and hence is measured with relation to
standard contribution.
The actual sales are redistributed in proportion of their budget estimates to get a revised
actual quantity (RAQ) mix. Hence, had the budget sales been 11,000 units, what would
have been the proportion of sales of each of these grades of fertilizers? This is shown in
the RAQ column. When compared with the original budget estimate of 10,000 units, it
can show the impact on standard contribution due to change in the proportion of quantity
of units sold.
A rise in the demand side for each grade of fertilizer resulted in positively contributing to
the profitability of the company.

20
Sales contribution volume variance = Sales contribution mix variance is ` 36,000
Favourable + Sales contribution quantity variance is ` 90,000 Favourable
= ` 1,26,000 (Favourable)
Higher sales due to spurt in demand (indicated from favourable sales contribution
quantity variance of ` 90,000) combined with a higher proportion of these sales coming
from the profitable Grade 1 fertilizer (indicated from favourable sales mix variance of
` 36,000), resulted in a favourable sales contribution volume variance of ` 1,26,000.
Cost variances
Increase in costs due to unplanned material procurement at higher rates also adversely
contributed.
Material Price variance is ` 2,20,000 Adverse.
Sr. Material Price Variance Grade 1 Grade 2 Grade 3 Total
No.
1 Standard Price (per kg) 150 100 75 -
2 Actual Price (per kg) 170 120 95 -
3 Actual Quantity (kg) 2,500 3,100 5,400 11,000
4 Material Price Variance = (50,000) (62,000) (1,08,000) (2,20,000)
(Standard Price - Actual
Price) × Actual Quantity
[(1) - (2) × 3]

The material procurement cost for all the grades was higher than standard. There have
been times when there is a sudden spike in demand for a particular grade of fertilizer
combined with a successful sales and marketing campaign that spurred sales volume.
Higher procurement cost from the open market than that agreed with the JIT supplier
partners resulted in an adverse impact on actual contribution.
Working Notes
Budget Contribution for the year 2024-25
Sr. Particulars Grade 1 Grade 2 Grade 3 Total
No.
1 Budget Quantity (kg) 2,000 3,000 5,000 10,000
2 Average Selling Price (per kg) 500 300 200 -
3 Direct Material Cost (per kg) 150 100 75 -
4 Direct Labour Cost (per kg) 100 60 75 -

21
 5 Variable Overhead Cost (per 50 40 10 -
kg)
6 Standard Contribution (per kg) 200 100 40 -
[2-(3+4+5)]
7 Budgeted Contribution [1 ×6] 4,00,000 3,00,000 2,00,000 9,00,000

Actual Contribution for the year 2024-25

Sr. Particulars Grade 1 Grade 2 Grade 3 Total
No.
1 Actual Quantity (kg) 2,500 3,100 5,400 11,000
2 Average Selling Price (per kg) 450 280 180 -
3 Direct Material Cost (per kg) 170 120 95 -
4 Direct Labour Cost (per kg) 100 60 75 -
5 Variable Overhead Cost (per 50 40 10 -
kg)
6 Actual Contribution (per kg) [2- 130 60 40 -
(3+4+5)]
7 Actual Contribution [1 ×6] 3,25,000 1,86,000 - 5,11,000

8. Evaluation of SAL’s Financial Performance

The benchmark WACC that SAL’s management wants to maintain is below 10%. The
company’s actual WACC is 7.636%. SAL has managed to maintain its WACC below the
required benchmark primarily on account of its capital structure. Long term debt of `16
crores, which is the cheaper source of capital, makes up more than half of the total capital
employed of ` 25 crores.
SAL’s financial performance reflects a strong operational foundation, though its capital
structure presents certain financial risks that require careful management.
With 64% of its capital sourced from debt financing, SAL carries a significant financial
obligation in the form of `1.12 crores in interest payments. While leverage can enhance
returns, it also increases financial risk, making strong cash flow management essential
for ensuring timely debt repayment and mitigating the risk of financial distress.
Despite this high debt level, SAL has demonstrated strong operational efficiency,
achieving an PBIT of ` 9 crores. This indicates the company’s ability to generate
substantial earnings before financial obligations. Additionally, its EVA of ` 4.391 crores
shows that SAL is earning returns above its cost of capital, confirming that it is creating
value for shareholders rather than merely covering financing costs.

22
To sustain this positive path, SAL must carefully assess new investment opportunities,
ensuring they generate returns exceeding its benchmark 10% WACC to drive long-term
value creation. Moreover, effective risk management strategies—such as hedging
against interest rate fluctuations, optimizing capital allocation, and maintaining a financial
buffer—will be crucial in mitigating potential risks and ensuring financial stability.
Overall, SAL’s strong operational performance and positive EVA highlight its ability to
generate value. However, its high reliance on debt necessitates vigilant financial
management. To ensure sustainable growth and maximize shareholder value, SAL
should focus on prudent debt management, strategic investment in high-return projects,
and robust risk mitigation strategies to navigate potential financial challenges effectively.
Workings
EVA = NOPAT – WACC × Capital Employed
= ` 6.3 Cr. – 7.636% × `25 Cr.
= ` 4.391 Cr.
Capital Employed = ` 5 Cr. + ` 4 Cr. + ` 16 Cr.
= ` 25 Cr.
WACC = (5 + 4)/25 × 12.5% + 16/25 × 4.9%
= 7.636%
NOPAT = [PBIT- Interest - Tax] + Interest (net of tax)

` in Cr.
PBIT 9.000
Less: Interest (1.120)
PBT 7.880
Less: Tax @ 30% (2.364)
PAT 5.516
Add: Interest (net of tax) [1.12 × (1 - 0.30)] 0.784
NOPAT 6.300

23
 ANSWERS TO THE CASE STUDY 4

Answers to the Multiple Choice Questions

1. (d) ` 6 million and no gain or loss
Reason: As per Ind AS 40, Initial recognition of an owned investment property
should be at cost only. As per para 59 of Ind AS 40, “Investment Property”
Transfers between investment property, owner-occupied property and inventories
do not change the carrying amount of the property transferred and they do not
change the cost of that property for measurement or disclosure purposes. Hence
if a property which was previously used for business operations, is subsequently
reclassified as an investment property, and the company follows the cost model,
the investment property should be recognized at its carrying amount at the date
of reclassification.
In this case, the property was purchased for ` 10 million on April 1, 2020. After 4
years, the carrying amount is ` 6 million, after accounting for depreciation. Since
as per Ind AS 40, the company has to follow the cost model, the fair value is
relevant only for disclosure and not for the recognition of the asset in the balance
sheet. Therefore, the investment property should be recognized at the carrying
amount of `6 million, as that is the value at which it is currently held on the books
and there will be no gain or loss on such reclassification.
2. (d) ` 54,670
Reason: Computation of customs duty payable by Mr. Raj Malhotra
Particulars `
Personal effects [Duty free clearance is allowed] Nil
Laptop computer [One laptop computer is exempt when Nil
imported into India by a passenger ≥ 18 years of age]
Jewellery [Duty free jewellery allowance is not available to 67,000
Mr. Raj since he did not reside abroad for more than 1 year]
Music system 1,25,000
Total value 1,92,000
Less: General duty-free baggage allowance of ` 50,000 50,000
Value of baggage liable to customs duty 1,42,000
Rate of Duty 38.50%
Customs duty @ 38.50% (including social welfare surcharge) 54,670

24
3. (b) ` 7,23,867
Reason: Expense for F.Y. 2023-24 = Expected number of employees at the end
of the vesting period x Shares per employee x Fair value of a share x
Proportionate vesting period
= 440 employees x 100 shares x ` 122 x 1/2 = ` 26,84,000
Expense for F.Y. 2024-25 = (Expected number of employees at the end of the
vesting period x Shares per employee x Fair value of a share x Proportionate
vesting period) - Expense recognized in the year 2023-2024
= (419 employees x 100 shares x ` 122 x 2/3) – ` 26,84,000
= ` 7,23,867
4. (c) 81.87%
Reason: Calculation of Shifts:
Total Shifts = Days per week × Shifts per week × Total Weeks
= 6 × 2 × 4 = 48 Shifts
Calculation of Un-Planned Downtime:
Un Planned Loss of minutes per shift = Total unplanned loss in minutes / Total
shifts
=1440/48 = 30 mins
Total Loss = Breakdown Maintenance (in mins) + Set up
Changes (in mins) + Power Failure (in mins)
= 360 + 840 + 240 = 1440 mins
Calculation of Planned Production time
Planned Production minutes per shift = Total Time – Planned Downtime
= 540 - 60 = 480 mins
Total Time = 9 hrs × 60 mins = 540 mins
Planned Downtime = Lunch Break + Miscellaneous Breaks +
Preventive Maintenance
= 30 + 15 + 15 = 60
Availability Ratio = {(480 min-30 min)/480 min}= 93.75%
Actual Production = 140 units per shift

25
 Standard time = 3 minutes
Standard Time Required
=140 units x 3 minutes
=420 minutes
Actual Time Taken
=480 mins - 30 mins.
=450 minutes
Performance Ratio
= (420 min/450 min) x 100
= 93.33%
Quality Ratio
= (131/140) x 100
= 93.57%
Thus, OEE 0.9375×0.9333×0.9357=81.87%
5. (a) No, as such appointment did not amount to appointment of Mrs. Sunita to an office
or place of profit in SPL.
Section 188 of the Companies Act, 2013, along with Rule 15 of the Companies
(Meetings of Board and its Powers) Rules, 2014 contain provisions which regulate
‘related party transactions’.
Further, Section 2(76) of the Act defines who is a ‘related party. As per Section
2(76), ‘related party’, with reference to a company, means a director or his relative;
Where the transaction or transactions to be entered into as contract or
arrangement is for appointment to any office or place of profit in the company, its
subsidiary company or associate company at a monthly remuneration exceeding
` 2.5 lakh as mentioned in clause (f) of subsection (1) of Section 188, approval
by an ordinary resolution is required.
The expression “office or place of profit” means any office or place −
(1) where such office or place is held by a director - if the director holding it
receives from the company anything by way of remuneration over and
above the remuneration to which he is entitled as director, by way of salary,
fee, commission, perquisites, any rent-free accommodation, or otherwise;

26
 (2) where such office or place is held by an individual other than a director or
by any firm, private company or other body corporate - if the individual,
firm, private company or body corporate holding it receives from the
company anything by way of remuneration, salary, fee, commission,
perquisites, any rent-free accommodation, or otherwise.
Mrs. Sunita, a relative of a JayZee Ltd.’s director, was appointed as a director in
JayZee Ltd.'s subsidiary, SPL, for a monthly salary of `3 lakhs in the F.Y. 2024-
25. This compensation, received as a related party holding a director position in
SPL, constitutes her sole remuneration. Consequently, her appointment does not
create an 'office or place of profit' with respect to JayZee Ltd. Therefore, JayZee
Ltd. was not required to obtain shareholder approval via an ordinary resolution for
her SPL directorship.
Descriptive Answer
6. As per paragraph 41 of Ind AS 8, errors can arise in respect of the recognition,
measurement, presentation or disclosure of elements of financial statements. Financial
statements do not comply with Ind AS if they contain either material errors or immaterial
errors made intentionally to achieve a particular presentation of an entity’s financial
position, financial performance or cash flows. Potential current period errors discovered
in that period are corrected before the financial statements are approved for issue.
However, material errors are sometimes not discovered until a subsequent period, and
these prior period errors are corrected in the comparative information presented in the
financial statements for that subsequent period.
As per paragraph 40A of Ind AS 1, an entity shall present a third balance sheet as at the
beginning of the preceding period in addition to the minimum comparative financial
statements if, inter alia, retrospective restatement has a material effect on the information
in the balance sheet at the beginning of the preceding period.
In the given case, expenses for the year ended 31st March, 2023 and liabilities as at 31st
March, 2023 were understated because of non-recognition of bonus expense and related
provision. Expenses for the year ended 31st March, 2024, on the other hand, were
overstated to the same extent because of recognition of the aforesaid bonus as expense
for the year. To correct the above errors in the annual financial statements for the year
ended 31st March, 2025, the entity should:
(a) restate the comparative amounts (i.e., those for the year ended 31st March, 2024)
in the statement of profit and loss; and

27
 (b) present a third balance sheet as at the beginning of the preceding period (i.e., as
at 1st April, 2023) wherein it should recognise the provision for bonus and restate
the retained earnings.
7. (A) (i) No. of Shares to be issued to the shareholders of BM Auto:
(10/20) × 12,50,000 = 6,25,000
(ii) Revised P/E ratio of BM Autos Ltd.
EPS of BM Auto = ` 12,50,000/ 12,50,000 = ` 1
Market Price = EPS × P/E Ratio
Revised Market Price of BM Autos Ltd. = ` 1 × 6.4 = ` 6.40
Exchange Ratio
New Exchange Ratio = ` 6.40 / ` 20 = 0.32 or i.e 0.32 shares of JayZee
Ltd. for one share of BM Autos Ltd.
Post-acquisition EPS of JayZee Ltd.
Post-acquisition EPS of JayZee Ltd.
= (` 50,00,000 + ` 12,50,000) / (25,00,000 + 12,50,000*0.32)
= ` 62,50,000/ 29,00,000 = ` 2.16
(iii) Desired Exchange Ratio
Post-acquisition total number of shares =
Post-Acquisition Earnings / Pre-Acquisition EPS of JayZee Ltd. =
` 62,50,000 / ` 2 = 31,25,000
Number of Shares Required to be Issued = 31,25,000 - 25,00,000
= 6,25,000
Thus, exchange ratio should be:
Exchange Ratio = 6,25,000 / 12,50,000 = 0.50
(B) In ordinary cases, the company taken over is the smaller company. The concept
of takeover by reverse bid, or of reverse merger, is thus not the usual case of
amalgamation of a sick unit which is non-viable with a healthy or prosperous unit.
Instead, it is a case whereby the entire undertaking of the healthy and prosperous
company is to be merged and vested in the sick company, which is non-viable.
A company becomes a sick industrial company when there is erosion in its net

28
 worth. This alternative is also known as taking over by reverse bid. The three tests
to be fulfilled before an arrangement can be termed as a reverse takeover are
specified as follows:
1. The assets of the transferor company are greater than the transferee
company.
2. Equity capital to be issued by the transferee company pursuant to the
acquisition exceeds its original issued capital.
3. The change of control in the transferee company through the introduction
of a minority holder or group of holders.
8. In the present case, auditors are unable to obtain sufficient and appropriate audit
evidence with respect to inventory of the company, neither the physical verification has
been done by the management nor adequate inventory records are being maintained by
JayZee Ltd. The audit team is also unable to undertake the physical inventory count and
as such the value of inventory could not be verified. Further, inventory constitutes 30%
of the total assets of JayZee Ltd., which is significant.
In the above case, the auditor is unable to obtain sufficient appropriate audit evidence
on which to base the opinion, and the possible effects on the financial statements of
undetected misstatements, if any, could be both material and pervasive. Thus,
auditors should give a Disclaimer of Opinion.
As per Companies Auditors’ Report Order 2020 (CARO 2020) dated 25th Feb 2020, the
audit report shall include a statement on the following matter:
Whether the physical verification of the inventory has been conducted at reasonable
intervals by the management and whether, in the opinion of the auditor, the coverage
and procedure of such verification by the management is appropriate. In view of the
above the auditor should give a qualification in his report narrating the situation.

29
 ANSWERS TO THE CASE STUDY 5

Answers to the Multiple Choice Questions

1. (c) 10% of net profits
Reason: Part (i) of the Second Proviso to Section 197(1), provides that except
with the approval of the company in general meeting by a special resolution, the
remuneration payable to any one managing director or whole time director or
manager shall not exceed 5% of the net profits of the company and if there is more
than one such director then remuneration shall not exceed 10% of the net profits
to all such directors and manager taken together.
Here, after the appointment of Mr. Keyur as Managing Director, since the company
had both Whole-time Director as well as Managing Director, the company Mr.
Amit, the company secretary would have told the maximum remuneration that is
allowed in a Financial Year to all such directors and manager taken together is
10% of net profits, as per the aforesaid provision.
2. (a) The company shall not waive recovery of excess remuneration paid unless
approved by BDS Bank before obtaining approval by a special resolution.
Reason: Section 197 of the Companies Act, 2013, Where the company has
defaulted in payment of dues to any bank or public financial institution or non-
convertible debenture holders or any other secured creditor, the prior approval of
such person respectively shall be obtained by the company before obtaining
approval of such waiver by a special resolution.
Hence, SWAL shall not waive recovery of excess remuneration paid unless
approved by BDS Bank before obtaining approval by a special resolution.
3. (b) There are 3 separate Performance obligations.
Reason: Promise to provide goods and services is distinct if
 the company can benefit from the good or service either on its own or
together with other resources that are readily available to the firm, and
 its promise to transfer the good or service to the company is separately
identifiable from other promises in the contract
For broadband and voice call services -
 Broadband and voice services are separately identifiable from other
promises as company has various plans to provide the two services

30
 separately. These two services are not dependant or interrelated. Also the
company can benefit on its own from the services received.
For sale of modem -
 Company can either buy product from Giganet or third party. No significant
customisation or modification is required for selling product.
Based on the evaluation we can say that there are three separate performance
obligations: -
 Broadband Service
 Voice Call services
 Modem
4. (d) The Software license provides a right to use the Intellectual Property that is
satisfied at a point in time.
Reason: Based on the facts given in question, although the updates and upgrades
will change the functionality of the software, they are not activities considered in
determining the nature of the entity‘s promise in granting the licence. The activities
of DBMS Ltd. to provide updates or upgrades are not considered because they
transfer a promised good or service to the company – i.e. updates or upgrades
are distinct from the licence. Therefore, the software licence provides a right to
use the IP that is satisfied at a point in time.
5. (c) JS & Associates will design the audit procedures based on their assessment of
risks that could potentially cause errors in the financial statements of SWAL.
Reason: As per SA 701
The concept of significant auditor attention recognizes that an audit is risk-based
and focuses on identifying and assessing the risks of material misstatement of the
financial statements, designing and performing audit procedures responsive to
those risks, and obtaining audit evidence that is sufficient and appropriate to
provide a basis for the auditor’s opinion. Options (a), (b), and (d) do not accurately
represent the emphasis on risk assessment in a significant auditor attention
approach.
Answers to the Descriptive Questions
6. (i) Michael E Porter, in 1980 in his book “Competitive strategy: Techniques’ for
analysing industries and competitors” suggested five force model to assess the
competitive environment of an industry. The five forces which are enumerated by

31
this model are the bargaining power of suppliers; the bargaining power of
customers (buyers); the threat of new entrants; threat of substitute products; and
the level of rivalry among current competitors in the industry.
This model is also named as porter’s five force analysis. Since each of these five
forces affect the competitiveness of business, hence can be used to assess the
potential of any organisation or entity; life-assurance business of SWAL (including
‘sub-agency office’ division) is not an exception to this. (Any Two Points)
The bargaining power of suppliers
Number of suppliers will decide the dominance they possess in term of bargaining
power regarding the price of good and service they supply to business. In case of
‘sub-agency office’ division following factors will affect the suppliers’ power–
Control over Value Chain – By
adopting the strategy of forward
integration the insurance companies
them-selves getting into the direct sale
through own network of branch offices
in order to enhance their margin or
reducing the margin earned by
SWAL’s ‘sub-agency office’ division.
Since number of insurance companies
are neither too less nor too much,
hence bargaining power of insurance companies; in terms of percentage
brokerage they offered to SWAL is moderate.
Importance of product – SWAL is also dealing in financial product’s marketing and
advisory, which contribute 50% of group sales and around 67% of group’s profit;
thus assurance business which is no doubt significant but only choice (business)
available to SWAL. Hence, bargaining power of supplier is moderate.
Substitution among the brand – Life assurance product offers similar utility to
client; hence easily substitutes among the brands, means if insurance company 1
charge lesser premium then insurance company 2, client will buy assurance of
company 1. No doubt switching is less viable once policy subscribed. Since
SWAL’s ‘sub-agency’ division is offering the product from all 23 insurance
companies, hence bargaining power of suppliers become low.
Supply of other factors – Other factor such ‘sub-agency offices’, which are largely
on lease, has 30-year lease, this will reduce the lease cost as well as bargaining
power of land-lord apart from bringing stability. (Any Two Points)

32
The bargaining power of customers
Whether seller is price taker or makes, this is outcome of bargaining power of
customers (true sense competition). If the bargaining power is high seller will
become price taker, else he is price maker. Following factors affect the bargaining
power of customers of SWAL’s ‘sub-agency’ division–
Number of buyers – In assurance industry the buyers are large (in comparison to
few number of suppliers) and diversified, hence their bargaining power is low.
Standardised products – Since the life assurance is the product, which is standard
from prospective of core functionality, hence buyers can easily substitute brands
and can negotiate to reasonable extent.
Switching – Once policy subscribed can’t be easily switched with another, hence
due to high switching cost bargaining power reduced to some extent at-least.
(Any Two Points)
The threat of new entrants
Although entry of a new firm to the industry/ market depends upon the level of
entry barriers, but if new entity enters into the industry; it will surely bring additional
capacity which enhance the stiffness of competition; hence become a kind of
threat. In case of ‘sub-agency office’ division, there are some major barriers to
entry–
Less number of new life-assurance licenses by regulator due to tough regulations
– As mentioned in the case that after considering the default by few insurance
firms and increasing customer complaints, regulator of insurance business in
country has tighten the registration criteria and harden the norms; hence this may
act as entry barrier and reduce the threat of new entrants.
Less number of new insurance agent due to no new authorisation by insurance
companies – As market is revamping, the agents is becoming competitor to the
insurance companies and as mentioned insurance companies stopped
authorising new insurance agents, hence this will act an entry barrier for new
insurance agents, which is a great positive for SWAL’s ‘sub-agency office’ division
and intact the competitive advantage.
Learning curve and economies of scale – Since all the 23 insurance companies
dealing in life assurance and SWAL are 10 to 20 years old organisations; hence
learning curve and economies of scale (shared services for the 580 offices -
presence in 580 cities) which they are enjoying may become entry barriers for new

33
 firm. Since new firms require huge capital to be at par to such learning curve and
economies of scale. (Any Two Points)
Threat of substitution
Substitution means the product from some other industry which can render the
same function which life assurance is rending. The threat of substitute product is
quiet low.
Competitive rivalry
The level of competition among the players to acquire or retain the market share
directly affects the profitability in an industry. Following factor is affecting the
competitive rivalry–
Number of competitors and respective market size – Since there are good number
of competitors, hence competition will be intense; may cut throat rivalry. Presently
SWAL’s insurance business represent 14.55% of market share (in 2024-25) in
comparison to 14.29% of market share five year ago, without any major variation,
hence possibility of gaining new market share is limited that too at high cost (in
form of advertisement and more after sale services).
Lack of differentiation – Standardise product results in high rivalry, since the life
assurance is standard product hence rivalry may be high on account of easy
substitution effect among the different brands.
Slow market growth – If market is growing at high rate, rivalry may be stiffer or
may be moderate; because everyone has reasonable opportunity to grow. The
moment growth stagnated rivalry become stiffer because no one wish to lose
market share. The industry life cycle curve is flatter here, because during last four
years overall industry wide CAGR (compounded annual growth rate) of life
assurance business is 3.39%, whereas year-on-year growth from 2023-24 to
2024-25 is 1.91%. Although potential is limited, but competition is still high.
Exit barriers – If the exit cost for player to move out of industry is high, it will have
to be in industry and fight for survival, which may make competition tougher. Since
agency agreement and lease agreement is already signed by SWAL hence, it
becomes difficult to exit from the business, hence need to participate in
competition to retain the share. (Any Two Points)
(ii) Case for holding the ‘sub-agency office’ division
The strategic review committee suggests that the SWAL’s ‘sub-agency office’
division should be sold off and that SWAL shall re-position its assurance business

34
as an online solution, but the same suggestion firstly needs to be evaluated in
terms of financial perspective among the other criteria.
The growth in life assurance business is stagnated and industry is in maturity
stage of industry life cycle. This is evident from industry size and growth in the
same. During last four years overall industry wide CAGR (compound annual
growth rate) of life assurance business is 3.39%, whereas year-on-year growth
from 2023-24 to 2024-25 is 1.91%. The moment growth stagnated rivalry become
stiffer because no one wish to lose market share. Hence, there is intense
competition in market. In cases where market witnesses intense competition,
operating efficiently is essential and reduction in cost become key success factor;
in order to offer competitive deals to clients and retain market share.
Hence it becomes need of hour, that we review the operating processes followed
at ‘sub-agency offices’ to check whether they are efficient or not, in order to ensure
greater profitability rather thinking to sale off the entire ‘sub-agency office’
division.
Now, move to financial analysis, which suggests it is beneficial to hold back ‘sub-
agency’ division.
Contribution to the group – Insurance business is contributing 50% of top-line of
overall group revenue (and 1/3rd of bottom line), and around 86% (280/ 326) of
this comes from ‘sub-agency office’ division and ‘E-platform’ division contribute
only remaining 14%.
Profitability – Margins are positive. There are two major parameters to evaluate
profitability further on–
 Operating profit (EBIT/ Revenue) – No doubt, operating profit shrink from
12.4% to 6.43% in three years’ time frame. But as earlier quoted, margin
is positive and secondly, there is sign of recovery as well. EBIT increased
in absolute terms (from 16 to 18).
 Return on capital employed (ROCE) [EBIT / (Equity + Long Term Debt)] –
No doubt, ROCE shrink from 15.5% to 7.69% in three years’ time frame.
But reduction in EBIT is not only a reason, another major reason for decline
is also change in capital structure. Long term debt is increased in absolute
terms (from 50 to 78).
Liquidity – Current ratio (Current Assets / Current Liabilities) being reasonable
measure of liquidity indicates enough liquidity in ‘sub-agency office’ division to
meets it obligation. There is minor decline from 1.367 times to 1.33 times.
Component analysis of working capital can be performed for greater insight.

35
Gearing (Debt / Equity) – Gearing ratio depicts the financial leverage, a measure
of risk. Gearing ratio no doubt increased as result of introduction of debt, from 1/3
to 1/2, but under control. (Any Two Points)
Some other quasi-finance and significant factors relevant to the decision of sale
of ‘sub-agency office’ division and full focus on ‘E-platform’ division–
Client’s demography – Clients from all age groups from 20 to 60+ are clients of
SWAL’s assurance brokerage business. 66.56% (217/326) of revenue coming
from clients with 50+ years of age, and 99% (215/217) out of them are associated
through ‘sub-agency offices’, hence holding of ‘sub-agency’ division become
essential. Secondly, clients from all age group may not find it convenient to shift
to ‘E-platform’ ‘Policy at you click’ and their resistance may result in losing
business. Thirdly, they have easily available substitute, because competitors also
have branch offices which will give them same feel.
Resistance from employees – Out of 1,564 on-roll employees of assurance
brokerage business, only 50 are associated in ‘E-platform’ division- ‘Policy at you
click’, rest all in ‘sub-agency office’ division. If SWAL re-structure itself fully as
online solution for life assurance then also can’t absorb all the employees, many
of them need to be retrenched. Resistance will be there in both the cases, because
transferred employee may not have requisite skill set, result in poor quality of
service and no job satisfaction to employee. Whereas in case of retrenched
workers redundancy cost will become additional financial burden. This can be
seen as exit barrier.
Legal aspect in term of pre-closure of lease - SWAL has practice to sign 30-year
lease, when so ever taking and ‘sub-agency office’ on lease in order to reduce the
lease cost and bring stability. It started the business 2 decades ago and expanded
it 3 years ago and many of leases are active right now, in case of pre-closure, it
may be possible to bear additional financial burden as per terms of lease
agreement.
Loosing USP – ‘Independence and impartial advice’ with presence wide across the
nation, in form of ‘sub-agency offices’ equipped with professionally trained sale
staff headed by financial planner or advisor, where customer can take advise and
discuss opinion prior to investing/ buying any insurance or financial product is USP
for SWAL’s assurance brokerage business. By disposing the ‘sub-agency office’
division this central idea, with which SWAL was established may be washed out.
(Any Two Points)

36
 In nutshell, the life assurance market has matured in recent years, and result
in low growth potential and lower profitability but still yielding positive
numbers. Hence, sale of ‘sub-agency’ division will adversely hit the revenue
as well as profitability.
7. As per Rule 32(4) of the CGST Rules, 2017, the value of supply under GST for each of
the plans would be as follows:
Plan 1: Investment-Linked Policy
Rule 32(4)(a): The gross premium is reduced by the amount allocated for
investment/savings.
Gross premium: ` 1,00,000
Investment/savings allocation: ` 60,000
Value of supply: ` 1,00,000 - ` 60,000 = ` 40,000
Plan 2: Single Premium Annuity
Rule 32(4)(b): For single premium annuity policies, the value is 10% of the single
premium.
Single premium: ` 5,00,000
Value of supply: 10% of ` 5,00,000 = ` 50,000
Plan 3: Regular Life Insurance
Rule 32(4)(c): For regular policies, the value is 25% of the premium in the first year and
12.5% of the premium charged from the policy holder in subsequent years.
First Year:
Premium: ` 80,000
Value of supply: 25% of ` 80,000 = ` 20,000
Second Year and onward:
Premium: 80,000
Value of supply: 12.5% of ` 80,000 = ` 10,000
Plan 4: Pure Risk-Cover Policy
Proviso to Rule 32(4): If the entire premium is for risk cover, the rule doesn't apply. The
entire premium charged from the policy holder is the taxable value.
Premium: ` 50,000 (entirely for risk cover)

37
 Value of supply: ` 50,000
8. At reporting date, no change in 12-month POD and entity assesses that there is no
significant increase in credit risk since initial recognition – therefore lifetime ECL is not
required to be recognised.
Particulars Details
Loan ` 100,00,00,000 (A)
LGD 25% (B)
PoD – 12 months 0.5% (C)
Loss allowance (for 12-months ECL) ` 12,50,000 (A×B×C)

38
 Mock Test Paper - Series II: April 2025
Date of Paper: 14th April 2025
Time of Paper: 2 P.M. – 6 P.M.

FINAL COURSE: GROUP – II

PAPER – 6: INTEGRATED BUSINESS SOLUTIONS
SUGGESTED ANSWERS

ANSWERS TO THE CASE STUDY 1

Answers to the Multiple Choice Questions

1. (b) ¥ 21,22,950
Reason: As per Rule 8 (computed value) read with Rule 3 and Rule 10 of Customs
Valuation (Determination of Value of Imported Goods) Rules, 2007, value of
imported goods shall be based on a computed value, which shall consist of the
sum of the cost or value of materials and fabrication or other processing employed
in producing the imported goods; an amount for profit and general expenses equal
to that usually reflected in sales of goods of the same class or kind as the goods
being valued which are made by producers in the country of exportation for export
to India; and the cost or value of all other expenses under sub-rule (2) of rule 10.
So, FOB value (in ‘000) shall be ¥ 2,040 (i.e.1,500 + 300 + 90 + 150)
Transport Cost given is ¥ 60
Cost of Insurance to the place of Import, since not ascertainable, hence 1.125%
of FOB value i.e. 1.125% of 2,040 is equal to ¥ 22.95
Hence, Assessable Value (in ‘000) shall be 2040 + 60 + 22.95 = 2122.95 or
¥ 21,22,950
2. (c) ` 8,69,607
Reason: Liability in $ to be paid in 3 months’ time = $10000
Deposit such number of dollars in the US, that it will become $10000 in three
months’ time = $10000 / (1+0.8%*) = $ 9921
* 3.2% is annual rate, to calculate quarterly rate simply divide it by 4.

1
 To deposit $9921, Daily Mart must have to borrow in ` to convert same in $ (but
transaction for $) at spot market exchange rate i.e. ` 85.9345 per $ (because
market will sell at higher). Daily Mart have to borrow ` 8,52,556 @8%p.a. for three
months.
Daily Mart have to pay back the ` borrowing in three months’ time i.e.
8,52,556+2% i.e. ` 869607.
(Note: All calculation round-off to nearest full unit of currency.)
3. (c) ` / ¥ 57.05
Reason: For imported goods, the conversion to ` shall be done with reference to
rate of exchange prevalent on the date of filling of bill of entry under section 46
of the Customs Act, 1962.
For custom valuation the rate of exchange means rate of exchange determined
by the board or ascertain in such manner as the board may direct.
Note for better understanding of students: The exchange rates of 22 currencies
is published online in advance for ease of all importers and exporters. These
exchange rates would be made available on the ICEGATE website twice a month
i.e., on the evening of the first and third Thursdays of the month and would be
effective from midnight of the following day. Detailed procedural modality has
been explained in the Circular 07/2024-Customs dated 25.06.2024.
4. (b) Statement II is correct but statement I is incorrect
Reason: Second proviso to section 161 (2) of the Companies Act 2013, provides
that an alternate director shall not hold office for a period longer than that
permissible to the director in whose place he has been appointed and shall vacate
the office if and when the director in whose place he has been appointed
returns to India; hence first statement is incorrect.
Further, second statement is correct, because as per section 161(1) of the
Companies Act 2013, the articles of a company may confer on its Board of
Directors the power to appoint any person, other than a person who fails to get
appointed as a director in a general meeting, as an additional director at any
time who shall hold office up to the date of the next annual general meeting or
the last date on which the annual general meeting should have been held,
whichever is earlier.
5. (d) II and III
Reason: As per sub-section 1 to section 14A of the Foreign Exchange
Management Act, 1999, the Adjudicating Authority may, by order in writing,
authorise an officer of Enforcement not below the rank of Assistant Director
to recover any arrears of penalty from any person who fails to make full payment

2
 of the penalty imposed on him under section 13 within the period of ninety days
from the date on which the notice for payment of such penalty is served on him.
Further, sub-section 2 provides that the officer referred to in sub-section (1) shall
exercise all the like powers which are conferred on the income-tax authority in
relation to recovery of tax under the Income-tax Act, 1961 (43 of 1961) and the
procedure laid down under the Second Schedule to the said Act shall mutatis
mutandis apply in relation to recovery of arrears of penalty under this Act.
Answers to the Descriptive Questions
6. One of the most often used business strategy tools for organisations to have a better
understanding of the primary competitive forces operating in their market is Porter's Five
Forces model.
Michael Porter, a professor at Harvard Business School, developed the Five Forces
Model, which was initially released in 1979. Porter's Five Forces are competitive rivalry,
supplier power, buyer power, threat of substitution, and threat of new entry.
When evaluating strategy, the model advises firms to take into account external factors
rather than only their direct rivals. Organisations can strengthen and improve their
competitive position in the market by redefining their strategy, identifying areas for
improvement, and making better judgements by comprehending these influences.
Assessment
Force 1 - Existing competitive rivalry
There are currently four competitors on the market, and it seems like there is fierce
competition. These businesses would probably oppose a newcomer to the market,
especially a big, global competitor like Daily Mart. This would most likely be accomplished
by tightening supplier contracts, expanding stores quickly, and increasing marketing.
Nevertheless, despite the recession, the scenario's data indicates that the "everything at
99" shop market sector is still expanding. This would imply that rivals may enhance their
outcomes by just keeping up with industry performance. Because other geographic areas
that aren't yet fully supplied by the current competitors can be exploited, the market may
even gain legitimacy and continue to grow as a result of Daily Mart's entry.
Moreover, Daily Mart is making income (bottom line) of 24 crores in existing country;
which more than total revenue (top line) of all four ‘everything at 99’ stores taken together
i.e. 22.60 crores; hence size of operation is a plus for Daily Mart.
Force 2 - Bargaining power of suppliers
The bargaining strength of Daily Mart's suppliers is minimal. Daily Mart Stores are the
primary clients of several small suppliers, with the exception of the almond provider. Due
of the lack of differentiation in the items, Daily Mart can easily switch suppliers. It is

3
improbable that any of these vendors could use forward integration to compete with their
present clients.
The suppliers of Daily Mart don't have much negotiating power. Their primary clients are
Daily Mart Stores, and there are several small suppliers (apart from the almond supplier).
Additionally, the items lack differentiation, making it simple for Daily Mart to switch
vendors. By using forward integration, none of these providers are likely to become rivals
of their present clients.
Force 3 - Bargaining power of customers
Customers of Daily Mart have significant negotiating leverage. There are several reasons
for this:
a. Customers looking for cheaper purchase costs are drawn to the products because
of their low profit margin.
b. The buyer can easily move to a different supplier because Daily Mart provides
unbranded commodity goods. As a result, switching costs are minimal.
c. Other suppliers can readily offer standard, undifferentiated products. In order to
get the best terms of supply, customers can thus select which supplier to work
with and pit the businesses against one another.
d. Because they are probably extremely price sensitive, customers will make
significant efforts to secure the best terms of supply.
Force 4 - Threat of substitutes
The "everything at 99" stores could be replaced by traditional supermarkets since they
provide a large selection of ambient goods, frequently with rival brands available. The
prices varies, though, and no supermarket has yet to use the discount fixed-price sale
strategy; instead, they prefer to set themselves apart with well-known brands. Since the
supermarkets are out of town with plenty of parking and easy access by car, location is
also a crucial factor. However, because Daily Mart is a well-known and significant
participant in the fixed-price sector, supermarkets may change their strategy as a result
of its entry into the Bangladesh countries.
Traditional supermarkets also provide home delivery and online shopping. The internet
might also be viewed as a substitute channel because ambient items, like those sold at
‘everything at 99’ stores, are ideally suited to this strategy. However, considering how
sensitive buyers are to pricing, the ` 25-50 delivery fee might lessen this threat.
Moreover, Daily Mart is making income (bottom line) of 24 crores in existing country;
while the largest traditional supermarket player in county Bangladesh has revenue (top
line) of 8.5 crores in F.Y. 2024-25; hence size of operation is a plus for Daily Mart or act
a back-up to be there and overcome initial hard days in the country Bangladesh.

4
 Force 5 - Potential entrants and barriers to entry
The substantial amount of capital needed to have a credible presence in this sector is a
major barrier to entrance. This is not expected to be an issue for Daily Mart, though,
since it has the funds on hand to lease a sizable number of stores in Bangladesh and
build a respectable presence in the region.
Since many towns and cities now have empty stores that are reasonably priced to rent,
the lower rental costs that are now available in Bangladesh also help to lower capital
expenditures. Additionally, more and more landlords are agreeing to rent these
establishments for a comparatively short fixed-term lease, whereas previously they
demanded exorbitant prices and lengthy leases. As a result, this market's departure costs
are decreased.
Brand awareness is one entry barrier that could pose a challenge for Daily Mart. The
current competitors have more than 85% brand recognition rate, while only 10% of people
are familiar with Daily Mart. If Daily Mart wants to succeed in this market, it could need
to invest a lot of money in a big marketing campaign.
(Note – Answer is explanatory in nature, reasonable amount of explanation by students
is also acceptable; provided they cover/consider all important facts/points)
7. All the elements of 7S framework have equal importance, while shared values are core
to rest of elements. Hard and Soft S are different from each other only in respect to
identification and influence that can be exercised by the management.
Strategy, Structure, and Systems are feasible and easy to identify. These can be found
in strategy statements, corporate plans, organizational charts and other documentations.
They are easier to change than the others. Therefore, called hard S elements.
While Skills, Staff, Style, and Shared Values are not change-feasible. These are harder
to describe since capabilities, values and elements of corporate culture are continuously
developing and changing. They are highly determined by the people at work in the
organization. Hence these are harder to change directly, and typically take longer to do
so. Therefore, called soft S elements.
Effective companies tend to pay equal attention to these soft S factors as much as they
pay to the hard S’s. Hence Daily Mart advised to focus on all the 7Ss.
8. As per Ind AS 115 “Revenue from contracts with customers”, revenue is recognized when
control of goods or services is transferred to the customer. The standard introduces a 5-
step model for revenue recognition, centred around the core principle that revenue
should reflect the transfer of promised goods or services in exchange for consideration
expected. If a contract includes a significant financing component, the transaction price
must be adjusted for the time value of money— as the timing of payments provides either
the customer or the entity with a significant financing benefit. Under Ind AS 115, when
goods are sold with the right of return, revenue is recognized only to the extent that it is
highly probable that a significant reversal of revenue will not occur when the uncertainty

5
is resolved. Recognize revenue for the portion of goods expected not to be returned.
Refund liability is recognized for the amount expected to be refunded.
Daily Mart will recognize revenue when control of the goods is transferred to Max Retail
and it becomes probable that no significant reversal will occur i.e., after the 90-day return
period, as the product is new and the return history is unavailable. The contract also
includes a significant financing component. This is evident from the difference between
the amount of promised consideration of ` 1,21,000 and the cash selling price of
` 1,00,000 at the date that the goods are transferred to the customer.
The contract includes an implicit interest rate of 10 per cent (i.e. the interest rate that
over 24 months discounts the promised consideration of ` 1,21,000 to the cash selling
price of ` 1,00,000). The entity evaluates the rate and concludes that it is commensurate
with the rate of interest that would be reflected in a separate financing transaction
between the entity and its customer at contract inception.
At the time of delivery:
• A contract liability of ` 1,00,000 is recognized, deferring revenue recognition.
• After 90 days, when returns are no longer expected, the contract liability is reversed
and revenue of ` 1,00,000 is to be recognized.
Financing component of ` 21,000 shall be recognized as interest income over the period
of 2 years. Until the entity receives the cash payment from the customer, interest revenue
would be recognized in accordance with Ind AS 109. In determining the effective interest
rate in accordance with Ind AS 109, the entity would consider the remaining contractual
term.

6
 ANSWERS TO THE CASE STUDY 2

Answers to the Multiple Choice Questions

1. (b) A – III, B – I, C – V, D – II, E – IV
Reason:
A Storing vendor delivered freshly laundered crockery, bedding and laundry
for future use as per guest requirements – Inbound Logistics as it relates
to activities of receiving, handling of materials from the supplier and their
storage until further use later in operations.
B Ensuring cleanliness and safety of rooms, working order of facilities offered
like TV and internet service, coffee machines – Operations as these are
activities related to converting inputs into production of output or service.
C The review of food items to remove the ones past expiry to ensure
customer satisfaction and safety – Outbound Logistics as it relates to
storage and movement of the end product from the production line to the
customer.
D Free shuttle service to attract guests to stay at the hotel – Marketing and
sales as these are activities related to communicating, selling and
delivering the product or service to the customer.
E Front desk activities handling complaints, customer support – Service
includes after sale service, handling customer complaints, customer
support, training etc. It is one of the most important activities in their value
chain model. Good service ensures happy guests.
2. (c) Threshold attribute
Reason: Threshold attribute as this is feature that is taken for granted by the
guests at the resort. However, if the required quality is not met it would cause
dissatisfaction.
3. (a) When all five directors of HomeInn Limited attending the meeting consent to
the acquisition of property
Reason: the resolution will be taken as passed when all five directors of HomeInn
Limited attending the meeting consent to the acquisition of property

7
4. (d) ` 1.90 crores. EVA = NOPAT less capital charge on invested capital
Reason: Net Operating Profit After Tax (NOPAT) = Net Operating Profit before
Interest and Tax Less Taxes
= `5 crores less 30% of `5 crores = `3.50 crores.
Capital charge on invested capital = WACC * Invested capital = 8% * `20 crores
= `1.60 crores.
Therefore, EVA = `3.50 crores less `1.60 crores = `1.90 crores.
5. (a) HomeInn Limited should outsource all its cleaning and food service
operations in all its properties ignoring the risks of outsourcing, if the cost
of outsourcing is less than the cost of providing this service in-house. This
is because the Economic Value Added (EVA) of the company will be
positively impacted despite the risk of outsourcing.
Reason: HomeInn Limited should reconsider the feasibility of operating properties
where the Economic Value Added (EVA) is negative. Negative EVA implies that
the profits from the property does not cover the cost of invested capital.
Answers to the Descriptive Questions
6. (a) Risks of outsourcing cleaning and food service under the luxury resort
model:
In the luxury resort business under the brand “HomeInn Comfort”, the target
guests are travellers on leisure. The primary feature of this model would be "good
quality of service". Maintaining cleanliness of premises and food service are
critical activities in the operation of luxury hotels. Therefore, customer satisfaction
on these metrics is paramount to sustain and grow business. With the ability to
post reviews online on booking portals, any negative review (whether justified or
not) can reach very easily to a large number of potential guests. This can
negatively impact future business. Hence, “HomeInn Comfort” brand has to
deliver the quality of service that it provides in terms of cleanliness and food that
should meet and beat the guests' expectation.
Outsourcing these services to well established vendors is advantageous since the
focus can remain on improving guest experience. It may also be cost
advantageous in many cases. However, there a number of risks in this model.
(1) The required quality of service for “HomeInn Comfort” resort properties
should be delivered by these vendors. Detailed service level agreements
need to drawn up to ensure this. HomeInn Limited should be able to

8
 monitor the performance of these vendors. In cases of non-delivery of the
required level of service, the agreement should provide for means of
redressal. This could vary from compensation for any loss in business to
immediate termination of service.
(2) HomeInn Limited should ensure that it can easily and economically switch
service providers if required. For this it has to identify alternate vendors
who can provide the same level of service as the current ones. At the same
time, since the resorts are in locations where the number of vendors
providing these services is limited, it increases the risk of outsourcing these
services. The other risk in outsourcing could be of instances
where well performing vendors could go bankrupt and shut shop. In such
cases, resort operations could be immediately impacted since such
services can no longer be availed from these vendors. Again, list of
alternate service providers is a necessary back-up that the hotel should
have.
(b) Where the management of HomeInn Limited determines that guests experience
(primarily influenced by cleanliness of facilities and food service) is a very
important critical success factor (CSF) it may choose not to outsource these
activities to outside vendors. Quality control issues and poor customer service
may wipe out any cost savings attributed to lower expenses from the outsourcing
model. HomeInn Limited would then have to consider developing in-house
departments that cater to cleanliness and food service. Control over factors such
as input material used, the performance of service, equipment used, training of
staff and other essential activities can ensure that the required service quality can
be achieved. Better service enhances guest experience through these critical
activities. Compared to outsourcing, this might be a costlier option. However,
since the guests are ready to pay a premium for service quality, HomeInn Limited
could choose to charge higher rates for its resort properties.
(c) The difference between the risk of outsourcing for “HomeInn Comfort” and
“HomeInn Budget” driven by the difference in the focus and target customer
segment of their respective business models. “HomeInn Budget” focuses on
providing value for money to the cost conscious short stay guests while “HomeInn
Comfort” focuses on customer experience through quality of service provided to
the guests staying on longer vacations.
As regards “HomeInn Budget” due to high real estate cost, both for ownership and
rental, the cleaning and food service has been outsourced. This
enables HomeInn Hotels to keep the costs of operation low, which is very critical

9
 for the business model of “HomeInn Budget”. Hence, instances of dis-satisfaction
among guests as regards quality of cleaning and food service, within certain limits
will not negatively impact business. These activities are non-core and hence can
be considered for outsourcing. For “HomeInn Budget”, the critical success factor
(CSF) is low cost of operations in order to be able to offer guests rooms at
reasonable rates.
As regards “HomeInn Comfort” where CSF is guests experience, which is primarily
influenced by cleanliness of facilities and food service, these activities become
core activities, hence the risks of outsourcing are higher. Therefore, there may
need to be a consideration whether to outsource these activities at all. Pricing for
rooms at these resorts can factor any additional costs to be incurred to ensure the
delivery of the required quality of service in these resorts.
(d) Branding of properties under either “HomeInn Budget” and “HomeInn Comfort”
makes helps potential customers determine their expectations from each of such
properties. Based on these expectations the customer appeal can be distinctly
determined for each of these properties. This will help them choose which property
could potentially satisfy their expectations better. Thus by operating different
properties under either “HomeInn Budget” or “HomeInn Comfort” brand, HomeInn
Limited has created a brand strategy that can effectively communicate their
product and service offering to potential customers.
7. Computation of total cost of construction of HomeInn Comfort” resort being
developed in Goa as per Indian Accounting Standard 16, “Property, Plant and
Equipment”
Particulars Amount (`)
Purchase of land 15 crores
Site preparation costs including cost of dismantling existing structures 2 crores
on site
Direct Material costs 8 crores
Direct Labour costs (including ` 20 lakh that was incurred during a 2.8 crores
labour strike)
Testing the safety of construction at the resort site 0.5 crores
Consultation fee (Legal and architect) related to construction of resort 1.5 crores
Total cost to be capitalized HomeInn Comfort” resort being developed 29.80 crores
in Goa as per Indian Accounting Standard 16.

10
 As per Para 20 (c) of Ind AS 16, “Property Plant and Equipment” recognition of costs in
the carrying amount of an item of property, plant and equipment ceases when the item
is in the location and condition necessary for it to be capable of operating in the manner
intended by management. Costs incurred in using or redeploying an item are not included
in the carrying amount of that item. Therefore, Costs of relocating or reorganising part or
all of an entity’s operations are not included in the carrying amount of an item of property,
plant and equipment.
Relocation expense of hotel manager from Mangalore to Goa and administrative and
general overheads allocated to the project by corporate office are not capitalized under
Indian Accounting Standard 16. Direct labour costs incurred during a labour strike is not
attributable to construction of resort and hence not capitalized. All other costs are directly
attributable to the construction of the resort.
8. As per Section 12(3) of the IGST Act, 2017, the place of supply of services by way of
lodging accommodation service by a hotel, inn, guest house, home stay, club or
campsite, by whatever name called, and including a house boat or any other vessel shall
be the location at which the immovable property or boat or vessel, as the case may be,
is located or intended to be located provided that if the location of the immovable property
or boat or vessel is located or intended to be located outside India, the place of supply
shall be the location of the recipient. In case Immovable property related service
attributable to different States/ Union territories – where the immovable property/ boat/
vessel is located, value shall be proportionate in the ration of number of nights stayed in
each such property.
The place of supply in this case is both in the Union territory of Delhi and in the State of
Rajasthan and the service shall be deemed to have been provided in the Union territory
of Delhi and in the State of Rajasthan in the ratio 4:2 respectively. The value of services
provided will thus be apportioned as ` 40,000/- in the Union territory of Delhi and
` 20,000/- in the State of Rajasthan.

11
 ANSWERS TO THE CASE STUDY 3

Answers to the Multiple Choice Questions

1. (b) On subsequent remeasurement as on 1st Oct, 2024, aircraft shall be carried
at ` 290 crore and there will be gain of ` 25 crore to be recognised in the
books as per Ind AS.
Reason: As per Ind AS 105, An entity should measure a non-current asset (or
disposal group) classified as held for sale at the lower of its carrying amount and
fair value less costs to sell. On 1st April, 2023, the fair value less costs to sell of
the aircraft was determined to be ` 250 crore, which was lower than its carrying
amount of ` 255 crore at that time. Accordingly, an impairment loss of ` 5 crore
was recognised in the profit and loss account, and the aircraft was carried at
` 250 crore. Following classification as held for sale, no further depreciation is
required to be recognised.
On 31st March, 2024, fair value less costs to sell has been reassessed at ` 265
crore. Accordingly, there is gain of ` 15 crore, which is less than the cumulative
impairment losses recognised to date (` 35 crore + ` 5 crore = ` 40 crore).
Accordingly, it is credited in profit or loss and the property shall be carried at
` 265 crore.
Subsequently, on 1st Oct, 2024, the fair value less costs to sell further increased
to ` 300 crore. There is further gain of ` 35 crore, however, Gain to be recognised
on remeasurement is restricted to the cumulative impairment losses recognised
to date (` 35 crore + ` 5 crore – ` 15 crore = ` 25 crore). Accordingly, a restricted
gain of ` 25 crore is credited in profit or loss and the property shall be carried at
` 290 crore.
2. (c) (i), (iii) and (iv)
Reason: The correct answer is (c). Lean thinking is an organized management
philosophy to reduce waste. In the above case scenario (i), (iii) and (iv) represent
reduction of waiting time for guests. Waiting time is a form of waste in a lean
system. Across the board reduction of ground staff to reduce cost of operations
on the other hand does not necessarily lead to reduction of waste. While cost
efficiencies are important, indiscriminate across the board reduction of ground
staff can cause inefficiencies in the process flow of operations. Since there is a
lot of passenger volume, this rather increases the possibility of generating waste
in the form of inefficient operations since there may be insufficient staff to handle
the operations.

12
3. (a) Performance attribute
Reason: The answer is (a) Performance attribute. This one dimensional shows
the linear relationship between YIAL’s investment in providing extensive
connectivity at affordable rates to that of customer satisfaction. Better the
connectivity and better the affordability by the customer, better the customer
satisfaction.
4. (d) As per the provisions of Companies Act, 2013, Mr. Chabbra is entitled to ` 2
crores as remuneration in FY 2024-25.
Reason: The correct answer is (d). Under Section II of Part II of Schedule V to
the Companies Act, 2013, the remuneration payable to managerial personnel is
linked to the effective capital of the company. Schedule V states that where in any
financial year during the tenure of a managerial person or other director, a
company has no profits or inadequate profits, it may pay remuneration to the
managerial person not exceeding ` 120 Lakh (` 1.2 crores) in the year in case
the effective capital of the company is between ` 100 crores and ` 250 crores.
However, the remuneration in excess of `120 Lakh maybe paid if the resolution
passed by the shareholders is a special resolution.
YIAL has an effective capital of ` 215 crores. From the foregoing provisions as
contained in Schedule V, the payment of ` 2 crore in FY 2024-25 to Mr. Chabbra
is more than ` 120 Lakh (` 1.2 crores) specified limit for companies with effective
capital between `100 crores and `250 crores. However, the remuneration of ` 2
crores has been approved by a special resolution passed by the shareholders.
Hence, Mr. Chabbra is entitled to ` 2 crores as remuneration in FY 2024-25.
5. (a) Operate affordable low cost model and premium full service model under
different brands of YIAL. Pricing of tickets can be differentiated based on
which model that particular flight is offering, higher price for premium full
service tickets and lower price for affordable tickets.
Reason: The correct answer is (a). Operate affordable low cost model and
premium full service model under different brands of YIAL. Pricing of tickets can
be differentiated based on which model that particular flight is offering, higher
price for premium full service tickets and lower price for affordable tickets.
This concept is based on multi-brand strategy with the goal of catering to different
customer segments simultaneously. By operating under different brands for example,
YIAL Express (for low cost affordable travel) and YIAL Comfort (for full service
premium travel), the passengers can clearly understand the expected level of service
offering from the flight. Pricing will also be accordingly charged based on the level of

13
 service. Hence, this will help avoid confusion about the service offering for the flight,
enabling YIAL to operate both models simultaneously.
Answers to the Descriptive Questions
6. As per the statement given in the problem, Flight 7J6622 incurs a net loss of `380.000.
This is the net result of revenue less costs. Revenue is entirely variable depending upon
passenger occupancy. Costs are both variable and fixed nature. To analyze the impact
of dropping Flight 7J6622, we need to re-compute net gain/ (loss) that YIAL earns when
it operates the flight based on relevant costing principles.
Net Gain/ (Loss) = Revenue earned from flight operations less Variable costs of operation
Revenue earned is the ticket revenue earned from flight operations of 7J6622, this is
entirely variable. Variable costs of flight operations are those expenses that would be
incurred only when the flight is operated. These include variable expenses per
passenger, salaries flight assistants, overnight costs for flight crew and assistants, fuel
for aircraft, a third portion of flight insurance that is specifically related to this flight sector
and flight promotion expense. These are expenses that will not be incurred if the flight is
not operated. Hence, relevant for decision making.
Other expenses like salaries of flight crew and hanger parking fees for aircraft are fixed
expenses that will be incurred even if the flight does not operate. Loading and flight
preparation expense is an allocated cost that will continue to be incurred even if flight
7J6622 does not operate. Depreciation of aircraft and liability insurance expense (2/3rd
portion not related to a specific flight sector) are sunk costs. These expenses have
already been incurred and hence are irrelevant to decision making. Therefore, these
fixed, allocated and sunk expenses are ignored while analyzing the decision whether to
continue operating flight 7J6622.
Statement showing Net Gain / (loss) if flight operations ` `
continue
Contribution margin if flight operations continue 600,000
Less: Relevant costs if flight operations continue
Salaries, Flight Assistants 80,000
Fuel for Aircraft 250,000
Liability Insurance (1/3 which is the special charge for high risk
destinations) 50,000
Flight Promotion 50,000
Overnight Costs for Flight Crew and Assistants 80,000
Total relevant costs if flight continues to operate 510,000
Net Gain / (Loss) 90,000

14
 If YIAL discontinues flight 7J6622, profits will reduce by ` 90,000. The statement showing
loss in operations of ` 380,000 is misleading for decision making purpose because it
accounts for costs that are fixed and irrelevant. However, since flight 7J6622 yields a net
gain of ` 90,000, flight operations should continue.
7. (i) Initial measurement of right-of-use of each aircraft would be calculated as
follows:
Particulars Amount (`)
Initial measurement of lease liability for each aircraft 8,50,00,000
Initial lease payments made to Airway Inc. on 1st October, 2024, 10,00,000
the lease commencement date (per aircraft)
Lease incentives received from Airway Inc. (per aircraft) (50,00,000)
Initial direct cost per aircraft 1,00,000
Initial measurement of right-of-use of each aircraft 8,11,00,000

Right-of-use of each aircraft will be ` 8.11 crores. For 5 aircrafts, the total lease
will be recognized at ` 40.55 crores.
(ii) YIAL is required to perform a planned check after every 1,00,000 hours of flight
hours for each aircraft. This obligation is dependent on future circumstances. For
example, YIAL may terminate the lease prematurely. Therefore, this does not lead
to an obligation and therefore there is no need to make any provision for these
checks. However, at the end of 12 years lease term, YIAL is obliged to carry out
a final check irrespective of the number of hours actually flown by the aircraft.
Hence, YIAL has to provide for these costs at the present value of expected costs.
This provision has to be made at the beginning of the lease term i.e. in the FY
2024-25. The costs must be included in the cost of the right-of-use (ROU) asset
pursuant to para 24 (d) of Ind AS 116.
8. Section 194-I requires deduction of tax at source at specified percentage on any income
payable to a resident by way of rent. Explanation to this section defines the term “rent”
as any payment, by whatever name called, under any lease, sub- lease, tenancy or any
other agreement or arrangement for the use of any (a) land; or (b) building; or (c) land
appurtenant to a building; or (d) machinery; or (e) plant; or (f) equipment; or (g) furniture;
or (h) fitting, whether or not any or all of them are owned by the payee.
On the issue of whether payment of PSF by an airline to an Airport Operator qualifies as
rent to attract TDS under section 194-I, the Bombay High Court relied on the Apex Court
ruling in Japan Airlines and Singapore Airlines case, wherein it was observed that the
primary requirement for any payment to qualify as rent is that the payment must be for

15
the use of land and building and mere incidental/minor/insignificant use of the same while
providing other facilities and service would not make it a payment for use of land and
buildings so as to attract section 194-I. Accordingly, the Bombay High Court declined to
admit the ground relating to the applicability of the provisions of section 194-I on PSF
charges holding that no substantial question of law arises. The provisions of section 194-
I shall not be applicable. Therefore, Mayank Saxena need not deduct TDS on the PSF
payments made to airport operators at Delhi and Mumbai.

16
 ANSWERS TO THE CASE STUDY 4

Answers to the Multiple Choice Questions

1. (b) Yes. Mr. Qureshi does not possess the necessary sectoral experience and
knowledge to perform the EQCR role effectively, and under SQC 1, he cannot
make decisions for the engagement team.
Reason: Under paragraph 68 of SQC 1 the firm’s policies and procedures should
address the appointment of EQCRs and establish their eligibility through technical
qualifications required to perform the role, including the necessary experience and
authority. Also, as per paragraph 70 of SQC 1 an EQCR does not make decisions
for the engagement team.
2. (d) 14 July 2024 – SQC 1 requires audit firms to establish policies for the timely
completion of audit files, and as per SA 230, this should ordinarily be no
more than 60 days after the auditor’s report date.
Reason: SQC 1 requires firms to establish policies and procedures for the timely
completion of the assembly of audit files.
As per paragraph A21 of SA 230, an appropriate time limit within which to
complete the assembly of the final audit file is ordinarily not more than 60 days
after the date of the auditor’s report.
3, (a) Self-review threat. The Firm will not appropriately evaluate the results of an
activity performed by an individual within the firm as part of a non-audit
service on which the audit team will rely when forming a judgment as part
of an audit.
Reason: Under ICAI’s Code of Ethics providing accounting and bookkeeping
services to an audit client create a self-review threat. As per the provisions of the
Guidance Note on Independence of Auditors, it is not permitted to do the book
keeping work of the auditee client.
4. (b) Disclaimer of audit opinion
Reason: The implication arising due to non-availability of information relating to
recovery of total financial exposure can possibly have a pervasive effect on the
financial statements.
SA 705 defines pervasiveness as follows:
Pervasive – A term used, in the context of misstatements, to describe the effects
on the financial statements of misstatements or the possible effects on the

17
 financial statements of misstatements, if any, that are undetected due to an
inability to obtain sufficient appropriate audit evidence. Pervasive effects on the
financial statements are those that, in the auditor’s judgment:
(i) Are not confined to specific elements, accounts or items of the financial
statements;
(ii) If so confined, represent or could represent a substantial proportion of the
financial statements; or
(iii) In relation to disclosures, are fundamental to users’ understanding of the
financial statements.
Since the total financial exposure, including investments in the subsidiary,
represented 60% of the company's total net worth at the year-end and a possible
reduction of 70% of profit before tax (basis high level estimate), the impact can be
pervasive. Accordingly, as per SA 705, disclaimer of opinion should have been
issued by CA. Manisha.
5. (d) No. Shareholders’ approval under section 188 is not required if the
transaction is at arm’s length and at ordinary course of business.
Reason: First proviso to Section 188(1) of the Companies Act, 2013 interalia
require companies to obtain shareholder approval if the prescribed threshold is
met. However, fourth proviso to section 188(1) state that the requirements of
section 188(1) including proviso do not apply to any transactions entered into by
the company in its ordinary course of business other than transactions which are
not on an arm’s length basis.
Answers to the Descriptive Questions
6. As per paragraph 9 of Ind AS 115, “An entity shall account for a contract with a customer
that is within the scope of this Standard only when all of the following criteria are met:
(a) the parties to the contract have approved the contract (in writing, orally or in
accordance with other customary business practices) and are committed to
perform their respective obligations;
(b) the entity can identify each party’s rights regarding the goods or services to be
transferred;
(c) the entity can identify the payment terms for the goods or services to be
transferred;
(d) the contract has commercial substance (i.e. the risk, timing or amount of the
entity’s future cash flows is expected to change as a result of the contract); and

18
 (e) it is probable that the entity will collect the consideration to which it will be entitled
in exchange for the goods or services that will be transferred to the customer. In
evaluating whether collectability of an amount of consideration is probable, an
entity shall consider only the customer’s ability and intention to pay that amount
of consideration when it is due. The amount of consideration to which the entity
will be entitled may be less than the price stated in the contract if the consideration
is variable because the entity may offer the customer a price concession”.
Paragraph 9(e) above, requires that for revenue to be recognised, it should be
probable that the entity will collect the consideration to which it will be entitled in
exchange for the goods or services that will be transferred to the customer.
In the given case, as the customer has liquidity issues, the collection is not
considered to be probable. Accordingly, till the time the Letter of Credit (LoC) is
arranged from a nationalised bank, criterion as mentioned in paragraph 9(e) is not
met. Hence, revenue recognition from sale to customer P should be deferred till
receipt of LoC.
7. To enhance the profitability and competitiveness of the bookkeeping division at BS & K
LLP, the firm must address both internal inefficiencies and external market challenges.
Here are strategic recommendations based on the analysis provided: (Any two points).
Analyse the Value Chain
To enhance profitability and operational efficiency, the firm should analyse its value chain
thoroughly. By optimizing key activities such as client engagement, service delivery, and
reporting, the firm can improve the quality of its offerings. This could involve establishing
stronger communication and collaboration between departments to ensure that
resources are used effectively and aligned with client needs.
Addressing Buyer Power
Currently, local firms have an advantage because they allow clients to negotiate prices,
whereas BS & K LLP offers fixed-price services.
To address this, the firm could offer customized pricing based on client size, volume of
transactions, or complexity of work. For example, providing tiered pricing or discounted
packages for long-term contracts could help attract price-sensitive clients.
In addition, highlight the superior quality of BS & K LLP’s services in client
communications, positioning the firm as a trusted advisor with more to offer than local
firms. Educating clients about the long-term benefits of high-quality, error-free
bookkeeping could justify a premium price.

19
Create a Centre of Excellence (CoE) and Leverage Local Talent
Establishing a Centre of Excellence would enable the firm to create a pool of highly skilled
professionals focused on standardizing best practices, improving operational efficiency,
and reducing costs across the organization. The CoE can implement standardized
operating procedures, ensuring consistency and high-quality output throughout the
bookkeeping division, minimizing errors and inefficiencies.
In conjunction with the CoE, the firm should actively participate in placement activities at
local colleges to hire skilled but more affordable graduate-level employees for
bookkeeping roles. This approach would not only lower staffing costs but also help
increase profitability. By providing ongoing professional development, mentorship, and
growth opportunities through the CoE, the firm can foster loyalty, reduce staff attrition,
and create a sustainable talent pipeline that aligns with long-term organizational goals.
Market Differentiation and Competitive Positioning
While local clients may initially be drawn to the lower prices of local firms, BS & K LLP
should focus on communicating the long-term benefits of working with a firm that provides
higher-quality, more reliable service.
Moreover, rather than competing solely on price, the firm should work on retaining
existing clients by building strong relationships, offering personalized services, and
providing value-added solutions, such as financial reporting, advisory, or tax planning
services in addition to bookkeeping.
Streamlined Expansion Strategy
Rather than expanding rapidly into new regions, the firm should focus on strengthening
operations in existing markets and ensuring each office becomes profitable. Centralized
support functions, such as IT and HR, could help standardize processes and reduce
overhead costs.
The firm should consider expanding in regions where local competition is weaker,
focusing on sectors or industries that require more complex, high-quality bookkeeping
services. This would help the firm build a niche presence and avoid direct competition
with local firms.
Conclusion
By addressing inefficiencies in its value chain, adopting more flexible pricing strategies,
leveraging local talent, and enhancing its competitive positioning, BS & K LLP can
improve the profitability of its bookkeeping division.

20
8. BS & K LLP establishes procedures to identify and evaluate possible threats to
independence and objectivity, including the familiarity threat that may be created by using
the same senior personnel on an audit or attest engagement over a long period of time,
and to take appropriate action to eliminate those threats or reduce them to an acceptable
level by applying safeguards. Following is an illustrative independence policy that may
be drafted by BS & K LLP considering the requirements of SQC 1:
 Requiring the engagement partner to provide relevant information about
client engagements, including the scope of services, to enable him to evaluate
the overall impact, if any, on independence requirements.
 Providing training to partners and professional staff on what constitutes threats
to independence and the nature of safeguards that may be taken to eliminate or
reduce the threats to an acceptable level. Such training should include ICAI's
responses to matters dealing with ethical conduct.
 Accumulating and communicating relevant information to appropriate
personnel so that the following can occur:
• The firm, the engagement partner, firm personnel and others, if any, can
readily determine whether they satisfy independence requirements.
• The firm can maintain and update information relating to independence.
• The firm and the engagement partner can take appropriate action regarding
identified threats to independence, in consultation with the independence
and ethics partner.
 Requiring personnel to promptly report circumstances and relationships that
create a threat to independence and independence breaches of which they
become aware to the independence and ethics partner so that appropriate action
can be taken.
 Establishing criteria to determine the need for safeguards for engagements
where the following have taken place:
• The firm's monitoring procedures or peer review has identified weaknesses
in previous years.
• The same senior personnel have been used for five years or more on an
audit or attestation engagement.
• The client pressurizes the engagement partner to take a particular position
or an accounting or auditing issue.

21
 Promptly communicating identified breaches of these policies and
procedures, and the required corrective actions, to the following personnel:
• The engagement partner who, with the firm, needs to address the breach.
• The independence and ethics partner who should report the breaches to
the managing partner for necessary action.
• Other relevant personnel in the Firm and those subject to the independence
requirements who need to take appropriate action.
 Requiring the engagement partner and the other individuals referred to in the
previous list to confirm to the firm that the required corrective actions have been
taken.
 Having the independence and ethics partner, or an individual designated by him,
periodically review unpaid fees from clients to ascertain whether any outstanding
amounts impair the firm's independence.
 Establishing additional procedures that provide safeguards when the firm
performs audit or other attest work for a) significant clients or b) clients at which
partners or other senior personnel are offered key management positions or have
accepted offers of employment.
 Documenting the threats and the safeguards applied to eliminate or reduce them
to an acceptable level for each instance.

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 ANSWERS TO THE CASE STUDY 5

Answers to the Multiple Choice Questions

1. (c) Income from dairy farming can be considered business income and is non-
agricultural income
Reason: The correct answer is (c) Income from dairy farming can be considered
business income and is non-agricultural income. Dairy farm operations are being
performed on agricultural land, hence there is an indirect connection to agricultural
land. However, it is not correct to classify income derived from dairy farm operations
to agricultural income merely on account of this connection. In dairy farm operations,
it is the livestock like cows, sheep and buffalo which are the main component.
2. (a) Operating profits can be improved without investing more capital
Reason: The correct answer is (a) EVA can be improved when operating profits
can be improved without investing more capital. This can be achieved if more
efficiency is built into the business operations, revenue can be boosted by
introducing more products or expanding market share, reducing costs etc.
In statement (b), the return on capital infused should be more than the cost of
additional capital. In statement (c), projects where return is less than cost of
capital need to be discontinued. Statement (d) implies that the cost of capital
should be manipulated to reflect a favourable EVA, which is not ethical.
3. (b) Digital Platform model
Reason: The correct answer is (b) Digital Platform model.
More specifically Reachme follows the Business to Consumer digital platform
model. Reachme is a digital platform that connects business to retail consumers.
4. (c) ` 14,40,000
Reason: Correct Option C = `14,40,000
Do not take forward Cover Take forward Cover
Present Cost: Take forward Cover at 87.90:
$ 10,00,000 × ` 85.90 = `8,59,00,000 Expected Cost after three months:
After three months $10,00,000 × ` 87.90 = ` 8,79,00,000
$10,00,000 × `89.34 = ` 8,93,40,000
Difference in cost between two options = `8,93,40,000 - `8,79,00,000
= 14,40,000

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5. (b) No, prior RBI approval is not required because the amount is within the
permissible limit under FEMA regulations.
Reason: Correct option is (b).
The following remittance by person other than individual shall require prior
approval of the Reserve Bank of India:
Remittances exceeding USD 10,000,000 per project for any consultancy services
in respect of infrastructure projects and USD 1,000,000 per project, for other
consultancy services procured from outside India.
Answers to the Descriptive Questions
6. (i) Calculation of ROI (Return on Investment)/ RI (Residual Income) for FY 2024-
25 for the divisions at Hoshiarpur, Punjab (Amount in `)
Dairy Animal Feed Crop
Particulars Division Division Protection
Division
a. Profit before interest and tax 60,10,000 63,77,500 57,66,000
b. Revenue 6,80,00,000 10,62,50,000 6,00,00,000
c. Head office expenses [@2% of
13,60,000 21,25,000 12,00,000
(b)]
d. Controllable operating profit
73,70,000 85,02,500 69,66,000
(a)+(c)
e. Net book value of plant and
5,65,25,000 7,43,75,000 2,62,50,000
equipment
f. Net current assets 1,04,75,000 1,51,25,000 60,00,000
g. Investment (e)+(f) 6,70,00,000 8,95,00,000 3,22,50,000
h. ROI [(d)/(g)×100] 11% 9.50% 21.6%
i. Required return [@9% of (g)] 60,30,000 80,55,000 29,02,500
j. RI [(d)-(i)] 13,40,000 4,47,500 40,63,500

The claim made by the manager of the Animal Feed Division is invalid because
it registered worst performance among the three divisions under both the criteria.
The ROI of Animal Feed Division is 9.50%, which is less than (11.00% and
21.60%) other two divisions, whereas RI is ` 4,47,500 which is also less than
(` 13,40,000 and ` 40,63,500) both other divisions.

24
 It is important to note that the Animal Feed Division earns the highest profit,
however since its investment is high the ROI and RI are the lowest compared
to the other divisions.
(ii) Evaluation of Expansion Proposal for frozen desserts – Dairy Division,
Hoshiarpur, Punjab
ROI/ RI for proposed expansion (for first year)
Amount in
Particulars
`
a. Additional investment in plant and equipment 1,75,00,000
b. Depreciation for first year on the above investment (15%) 26,25,000
c. Net book value of additional investment in plant and
1,48,75,000
equipment at reporting date (a-b)
d. Additional net current assets 25,00,000
e. Total additional investment (c)+(d) 1,73,75,000
f. Additional contribution 95,00,000
g. Additional fixed cost 8,50,000
h. Net addition to earning (f)-(g)-(b) 60,25,000
i. ROI [(h)/(e)×100] 34.68%
j. Required return [9% of (e)] 15,63,750
k. RI [(h)-(j)] 44,61,250

Advise
ROI Criteria – Management of VEN private limited must expand the business of
Dairy Division by venturing into manufacturing of frozen desserts, because the
proposed expansion expected to generate ROI at rate of 34.68%, which is not
only more than existing ROI of Dairy Division (11%) but also more than
overall ROI as well (because among the three division the maximum ROI
generated by Crop Protection Division i.e., 21.6%).
RI Criteria – Management of VEN private limited must expand the business of
Dairy Division by venturing into manufacturing of frozen desserts, because the
proposed expansion expected to generate additional RI of `44,61,250.

25
(iii) ROI improves with age of the assets
Since ROI is rate of earning as percentage of investment, hence while assets
getting older the amount of investment reduced; resultantly if same productivity
or efficiency is maintained then ROI improves. Same can be seen through
calculations below that ROI improves from 34.68% in first year to 40.85%, and
49.69% respectively in second and third year.
ROI for proposed expansion over years (Amount in `, round off to nearest rupee)
Particulars Second Year Third Year
a. Plant and equipment at beginning of year 1,48,75,000 1,22,50,000
b. Depreciation for year on the above plant and
26,25,000 26,25,000
equipment (15%)
c. Net book value of plant and equipment at
1,22,50,000 96,25,000
reporting date (a)-(b)
d. Net current assets (assumed to be constant) 25,00,000 25,00,000
e. Total relevant investment (c)+(d) 1,47,50,000 1,21,25,000
f. Contribution (assumed to be constant) 95,00,000 95,00,000
g. Fixed cost (assumed to be constant) 8,50,000 8,50,000
h. Net addition to earning (f)-(g)-(b) 60,25,000 60,25,000
i. ROI [(h)/(e)×100] 40.85% 49.69%

(iv) Non-Financial Performance Indicators (NFPIs) are sustainable action-based

indicators. For example, employee training will increase the profit & let them feel
empowered, putting effort in research and development will result in a high brand
image & high intellectual property rights. Hence for being sustainable rather being
only profitable an organisation needs to include NFPIs as part of performance
matrix in addition to financial performance Indicators. Although the scope of NFPIs
substantially depends upon width and depth of organisation’s objective,
operations and strategies, but generically VEN Private Limited can consider–
Human resources management
Superior performance comes from superior processes. Who actually devise and
execute superior processes to build an organisation with competitive advantage?
It is the people (human resources) and their efforts. Hence human resources are
a significant element for success of any organisation. If they performance well,
then entire organisation automatically performs well; hence measures such as

26
 staff turnover, absenteeism, job satisfaction, and offer letter accepted shall be part
of performance metrics.
Product and service quality
What make any business distinct from others, what are the sources of
competitive advantage? It is substantially the value which its products or services
capable to create for the users; and quality is important determinant of value.
Simply saying quality is conformance to need to user. Hence the following
performance measures, owning to quality shall be part of performance metrics
1. What are the functions that product or service offers and how much value
these are capable to generate?
2. Where do our product stand in market in comparison that of competitors,
especially rivals?
3. Is product capable to generate further superior performance and scope of
innovation?
Brand awareness and company profile (brand equity)
Non-financial performance measures consider the brand equity (value of the
brand) as one of the significant performance measures. Brand value is largely
based upon factors like customer’s awareness & loyalty which includes
consumer behaviour also perceived quality, stakeholder’s expectation and
organisation ability to meet them, and factors like patents and trademarks etc.
7. Extract from Balance Sheet

Non-Current Asset Note Reference Amount (`)

Property, Plant and Equipment
Land Note C 3,00,00,000
Biological assets other than bearer plants
Dairy Cows Note A (iii) 52,00,000
Calves Note B 8,80,000
Inventory
Milk Note E 4,50,000

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Extract from the Statement of Profit & Loss
Note Reference Amount (`)
Income
Change in fair value of purchased dairy cow Note (A) (iii) 10,00,000
Change in fair value of newly born calves Note B 8,80,000
Grant received Note D 10,00,000
Fair value of milk Note E 4,50,000
Total Income 33,30,000
Expenses
Maintenance Note A (iv) 12,00,000
Breeding fee Note A (iv) 5,00,000
Total Expense 17,00,000
Net Income 16,30,000

Working Note
The impact of various transactions mentioned in Annexture 1, as regards dairy operations
at Dhagwar, Himachal Pradesh for FY 2025-26 in the financial reports, of FY 2025-26
are as below:
(A) Acquisition of Dairy Cows: The herd of cows are biological assets as per Ind
AS 41 that covers reporting requirements for the agricultural sector. It mentions
that agricultural activity includes the management of the transformation of
biological assets (living plants and animals) into agricultural produce (harvested
product of the entity’s biological assets). Here dairy cows (animals) are used to
produce dairy products like milk (harvested produce). Dairy cows, that represent
the biological asset will be recorded as Separate line item “Biological Asset other
than bearer plants” under non-current asset in the Balance Sheet using the fair
value model laid down in Ind AS 41.
Accordingly, the 100 cows which had an average age of 3 years that were
purchased on April 1st, 2025, had a fair value of `42,000 per cow. As of year end,
there has been an increase in the value of this biological asset. This is on account
of 2 factors:
(i) Increase in the price of a 3-year-old cow from `42,000 per cow to `50,000
per cow. This represents an increase of `8,00,000 on account of the
increase in price (`50,000 per cow - `42,000 per cow = `8,000 per cow ×

28
 100 cows = `8,00,000). This will be recognized in the profit and loss
account for FY 2025-26.
(ii) Physical change in cow, due to the passage of 1 year increases the
average age of cows from 3 years to 4 years. On account of this on March
31st, 2026, while a 3-year-old cow is valued at `50,000 per cow; the cows
that now have an average age of 4 years as of this date are valued at
`52,000 per cow. Therefore, each cow has had its market value increase
by `2,000 per cow as of March 31st, 2026. This increase in the value of the
biological asset due to physical change works out to ` 2,00,000 (` 52,000
per cow - `50,000 per cow) ×100 cows). This will be recognized in the profit
and loss account for FY 2025-26.
(iii) Accordingly, as of March 31st, 2026, the Balance Sheet will reflect
` 52,00,000 as the value of 100 cows with an average age of 4 years (100
cows × ` 52,000 per cow). The profit and loss account will show an income
of `10,00,000 on account of (a) price increase in the value of biological
asset `8,00,000 (refer point (i) above) and (b) increase in value due to
physical change of the biological asset ` 2,00,000 (refer point (ii) above).
(iv) Corresponding expenses, of ` 5,00,000 breeding fees paid to the local
farmer and ` 12,00,000 various herd maintenance expenses will be
considered as expenses in the profit and loss account for the year.
(B) Calves born during FY 2025-26: These biological assets have been acquired on
account of breeding the cows. It is not possible to calculate the “cost of
acquisition” of such calves and hence they will be shown as an asset in the
Balance Sheet valued at fair value as on March 31st 2026, and this value will be
credited to the profit and loss as income for the year.
It is given that 20 calves were born on October 1st, 2025. Therefore, their age, as
on March 31st 2026, will be 6 months. The fair value net of any cost to sell of these
calves as on March 31st, 2026, is ` 44,000 per calf. Hence the value of 20 calves
at the year end will be ` 8,80,000, in the balance sheet as well as considered as
income in the profit and loss for the year.
(C) Land acquisition: The purchase of land is not covered under Ind AS 41. The
relevant standard would be Ind AS 16 “Property, Plant and Equipment”. According
to it land would be considered as an asset, valued at cost in the Balance Sheet
as of March 31st 2026. Since the useful economic life of the land is infinite, no
depreciation can be charged against it. Therefore, the value of land as shown in
the Balance Sheet as of March 31st 2026, will be at the cost of acquisition which

29
 is ` 3 crores. Any subsequent change in market value post-acquisition is ignored
under the cost model. (Please note that the allowed alternative corresponding
treatment under revaluation model permits the land to be revalued to market
value with the revaluation surplus taken to other comprehensive income).
(D) Grant received: VEN received a non-refundable grant of `10,00,000 for
acquisition of cows. It is not subject to any conditions or requirements to be
satisfied; hence it is an unconditional grant. As per Ind AS 20, this grant needs to
be considered as income of the company and credited to the profit and loss
account.
(E) Inventory of milk: Milk is an agricultural produce and will be measured on the
same basis as biological assets. As of March 31st, 2026, VEN has 10,000 litres of
milk in cold storage, the fair value of which is ` 45 per litre. Therefore, milk would
be valued at ` 4,50,000. This will be reflected as part of Inventory in the Balance
Sheet. This is regarded as “cost” for future application of Ind AS 2 to the unsold
milk. The fair value of milk is also considered as income in the profit and loss
account.
8. Forward Cover
Amount Payable under Forward Cover ($10,00,000 × ` 87.90) = ` 8,79,00,000
Money Market Hedge
To pay $ after 3 months' company shall require borrowing in ` and translate to $ and
then deposit in $.
For payment of $10,00,000 in 3 months @ 4.00% interest p.a. the amount required to be
deposited now ($10,00,000/1.01) = $9,90,099.01
With a spot rate of 85.90 the ` loan needed will be = ` 8,50,49,504.96
Loan repayable after 3 months @ 8.00% p.a. interest will be `8,50,49,504.96 (1.02) =
` 8,67,50,495.06
Advise
Since outflow of cash shall be least in case of Money Market Hedge hence it should be
opted for.
The suggested answers provided in these Case Studies includes a variety of potential
solutions/ alternative points where applicable. This is intended to assist students by
offering multiple perspectives and approaches to problem-solving.

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