Question 1

Mr. Krishna (aged 65 years), a furniture manufacturer, reported a profit of ₹ 5,26,000 for the previous year 2019-20 after debiting/crediting the following items:

Accepted Answer

**Computation of Total Income of Mr. Krishna (AY 2020-21 / PY 2019-20)**

**Treatment of Debit Items:**

**D1 – Donation to Gurudwara ₹20,000 (Cash):** This is a personal charitable donation, not a business expenditure. It must be **added back** to profit. Further, no deduction is available under **Section 80G of the Income Tax Act, 1961**, because Section 80G(5D) prohibits deduction for cash donations exceeding ₹2,000. Since the amount of ₹20,000 was paid entirely in cash and the Gurudwara accepted no cheques, the 80G deduction is **NIL**.

**D2 – Contribution to University u/s 35(1)(ii) ₹48,000:** The contribution to a university approved and notified for scientific research qualifies under **Section 35(1)(ii) of the Income Tax Act, 1961**. For AY 2020-21, the weighted deduction rate is **150%** (Finance Act 2017 reduced it from 175% to 150% w.e.f. AY 2018-19; further reduction to 100% is only from AY 2021-22 per Finance Act 2020). Allowable deduction = 150% × ₹48,000 = ₹72,000. Since ₹48,000 is already debited, an **additional deduction of ₹24,000** is allowed.

**D3 – Interest on E-vehicle Loan ₹1,67,000:** The E-vehicle was purchased for the **personal use of his wife**, so the interest is not a business expense. It must be **added back** to business profit. However, since the loan was taken from a bank (a financial institution) and was sanctioned on 15-02-2020, which falls within the prescribed period of 01-04-2019 to 31-03-2023, a deduction of ₹1,50,000 (lower of actua…

Question 2

Calculate the total cost per unit of each product using the Absorption Costing Method.

Accepted Answer

**Note:** The question appears to be incomplete as no product data, cost figures, overhead rates, or production quantities have been provided. The solution below demonstrates the **Absorption Costing Method** framework with a standard illustrative example so the methodology is clear.

**Absorption Costing** (also called **Full Costing**) charges all manufacturing costs — both fixed and variable — to the product cost. All production overheads are absorbed into product cost using a pre-determined overhead absorption rate (OAR).

**Structure of Total Cost per Unit under Absorption Costing:**

**Direct Material per unit** — actual material consumed per unit

**Add: Direct Labour per unit** — wages directly traceable per unit

**Add: Direct Expenses per unit** — any other prime cost elements

**= Prime Cost per unit**

**Add: Variable Manufacturing Overhead per unit** — absorbed using OAR

**Add: Fixed Manufacturing Overhead per unit** — absorbed using OAR (Budgeted Fixed OH ÷ Budgeted Output)

**= Factory/Works Cost per unit**

**Add: Administration Overhead per unit** — absorbed as % of works cost or per unit basis

**Add: Selling & Distribution Overhead per unit** — absorbed on per unit or % of sales basis

**= Total Cost of Production per unit**

**Key Formula — Overhead Absorption Rate (OAR):**
OAR = Budgeted Overhead ÷ Budgeted Base (units, hours, etc.)
Fixed OH per unit = Budgeted Fixed OH ÷ Budgeted Production Units

**Illustrative Example (Two Products — A and B):**
If Bu…

Question 3

MNO Ltd has provided following details: Opening work in progress is 10,000 units at ₹ 50,000 (Material 100%, Labour and Overheads 50% complete). Input of materials is 55,000 units at ₹ 2,20,000. Amount spent on Labour and Overheads is ₹ 26,500 and ₹ 61,500 respectively. 9,300 units were scrapped, degree of completion for material 100% and for labour & overheads 60%. Closing work in progress is 12,000 units, degree of completion for material 100% and for labour & overheads 90%. Finished units transferred to next process are 43,500 units. Normal loss is 5% of total input including opening work in progress. Scrapped units would fetch ₹ 8.50 per unit. You are required to prepare using FIFO method:

Accepted Answer

**Preliminary Computations**

**Total Input** = Opening WIP (10,000) + Fresh Input (55,000) = **65,000 units**

**Normal Loss** = 5% × 65,000 = **3,250 units**

**Abnormal Loss** = Total Scrapped − Normal Loss = 9,300 − 3,250 = **6,050 units**

**Units from fresh input transferred to finished** = 43,500 − 10,000 (Opening WIP) = **33,500 units**

*Note: Input (65,000) vs. output summation (43,500 + 12,000 + 3,250 + 6,050 = 64,800) shows a 200-unit discrepancy — this is a rounding/data inconsistency in the question; solution proceeds on available data.*

---

**(i) Statement of Equivalent Production (FIFO Method)**

Under **FIFO**, only work done in the **current period** is counted. Opening WIP material was already 100% complete; labour & OH were 50% complete, so 50% remains to be done this period.

| Output | Total Units | Material % | Material EU | Labour % | Labour EU | OH % | OH EU |
|---|---|---|---|---|---|---|---|
| Opening WIP completed | 10,000 | 0% (already done) | — | 50% | 5,000 | 50% | 5,000 |
| Freshly started & transferred | 33,500 | 100% | 33,500 | 100% | 33,500 | 100% | 33,500 |
| Abnormal Loss | 6,050 | 100% | 6,050 | 60% | 3,630 | 60% | 3,630 |
| Closing WIP | 12,000 | 100% | 12,000 | 90% | 10,800 | 90% | 10,800 |
| Normal Loss | 3,250 | — | — | — | — | — | — |
| **Total** | **64,800** | | **51,550** | | **52,930** | | **52,930** |

**Statement of Cost per Equivalent Unit:**

Question 4

GHI Ltd. manufactures 'Stent' that is used by hospitals in heart surgery. As per the estimates provided by Pharmaceutical Industry Bureau, there will be a demand of 40 Million 'Stents' in the coming year. GHI Ltd. is expected to have a market share of 2.5% of the total market demand of the Stents in the coming year. It is estimated that it costs ₹ 1.50 as inventory holding cost per stent per month and that the set-up cost per run of stent manufacture is ₹ 225.

Accepted Answer

**Solution: Economic Batch Quantity (EBQ) for GHI Ltd.**

**Given Data:**
Total market demand = 40 Million stents; GHI Ltd.'s market share = 2.5%; therefore, **Annual Demand (D) = 40,000,000 × 2.5% = 10,00,000 stents**. Holding cost (H) = ₹1.50 per stent per month = ₹18 per stent per annum. Set-up cost per run (S) = ₹225.

**(i) Optimum Run Size (Economic Batch Quantity):**

The formula for EBQ is: **EBQ = √(2DS/H)**

EBQ = √(2 × 10,00,000 × 225 / 18) = √(45,00,00,000 / 18) = √2,50,00,000 = **5,000 stents**

The optimum run size for stent manufacture is **5,000 stents per run**.

**(ii) Minimum Inventory Holding Cost:**

At the optimum run size, average inventory = EBQ / 2 = 5,000 / 2 = 2,500 stents.

Minimum Inventory Holding Cost = Average Inventory × Holding Cost per unit per annum = 2,500 × ₹18 = **₹45,000**

(Note: At EBQ, total holding cost equals total set-up cost. Number of runs = 10,00,000 / 5,000 = 200; Set-up cost = 200 × ₹225 = ₹45,000 — confirming equality. Total minimum cost = ₹90,000.)

**(iii) Extra Cost at Policy Run Size of 4,000 Stents:**

At 4,000 stents per run — Number of runs = 10,00,000 / 4,000 = 250 runs; Set-up cost = 250 × ₹225 = ₹56,250; Average inventory = 4,000 / 2 = 2,000 stents; Holding cost = 2,000 × ₹18 = ₹36,000; **Total cost at 4,000 run size = ₹92,250**.

At optimum 5,000 stents per run — Total cost = ₹90,000 (as computed above).

**Extra cost incurred = ₹92,250 − ₹90,000 = ₹2,250**

By adopting a policy of 4,000 stents per run instead of …

Question 5

During the financial year 2018-19, he has also set up a warehousing facility in a district of Tamil Nadu for storage of agricultural products. It fulfills all the conditions of section 35AD. Capital expenditure in respect of warehouse amounted to ₹ 93 lakhs (including cost of land ₹ 13 lakhs). The warehouse became operational with effect from 1st April, 2019 and the expenditure of ₹ 63 lakhs was capitalized in the books on that date. The details relevant for the financial year 2019-20 are as follows: Profit from operation of warehousing facility before claiming deduction under section 35AD: ₹ 1,10,00,000; Net Profit of SEZ (Mobile Phone) Unit: ₹ 50,00,000; Export sales of SEZ (Mobile Phone) Unit: ₹ 90,00,000; Domestic Sales of SEZ (Mobile Phone) Unit: ₹ 60,00,000. Compute income tax (inclu…

Accepted Answer

**Note:** The question refers to 'AMT under 115E' which appears to be a typographical error; Section 115E applies to investment income of non-resident Indians. The correct provision for Alternate Minimum Tax on non-corporate taxpayers is **Section 115JC of the Income Tax Act, 1961**. The computation below applies Section 115JC.

**Step 1 — Deduction under Section 35AD (Warehousing Facility)**

Section 35AD grants a **100% deduction** on capital expenditure (excluding land and goodwill) incurred for specified businesses. A warehousing facility for storage of agricultural produce is a specified business under Section 35AD(8)(c).

Total capital expenditure incurred in FY 2018-19: ₹93,00,000. Less: Cost of land (ineligible): ₹13,00,000. **Eligible Section 35AD deduction = ₹80,00,000.** Since the facility commenced operations on 1st April 2019 (i.e., the whole of the pre-commencement expenditure is deductible in FY 2019-20 per Section 35AD(1A)), the full ₹80,00,000 is claimable in AY 2020-21. The ₹63,00,000 figure represents the accounting capitalisation amount in books, which does not restrict the tax deduction — Section 35AD operates on actual expenditure incurred.

**Step 2 — Deduction under Section 10AA (SEZ Mobile Phone Unit)**

Section 10AA deduction = Net Profit × (Export Turnover ÷ Total Turnover) = ₹50,00,000 × (₹90,00,000 ÷ ₹1,50,00,000) = **₹30,00,000** (assuming the unit is within its first five-year window at 100% rate).

**Step 3 — Computation of Total Income**

Prof…

Question 6

Calculate the total cost per unit of each product using the Activity Based Costing Method.

Accepted Answer

**Incomplete Question — Data Not Provided**

The question requires numerical data to solve using the **Activity Based Costing (ABC) Method**, but no supporting information has been supplied. To calculate the total cost per unit under ABC, the following data is typically required:

1. **Direct Costs per unit** — Direct Material and Direct Labour for each product.
2. **Overhead Cost Pool** — Total overhead costs grouped by activity (e.g., Machine Set-up Cost, Material Handling Cost, Quality Inspection Cost, etc.).
3. **Cost Drivers** — The basis used to assign each overhead pool to products (e.g., number of set-ups, number of requisitions, number of inspections).
4. **Activity Consumption** — How much of each cost driver is consumed by each product.

**General Framework under ABC:**

**Step 1 — Identify Activities and Cost Pools:** Group overheads into homogeneous activity cost pools.

**Step 2 — Compute Cost Driver Rate:** Cost Driver Rate = Total Cost of Activity Pool ÷ Total Cost Driver Units.

**Step 3 — Assign Overhead to Products:** Overhead assigned to a product = Cost Driver Rate × Cost Driver units consumed by that product.

**Step 4 — Compute Total Cost per Unit:**
Total Cost per Unit = Direct Material per unit + Direct Labour per unit + (Total Overhead assigned to product ÷ Units produced).

Please provide the complete question data (cost pools, cost drivers, production volumes, and direct cost details) so that a full numerical solution can be worked out.

Question 7

यदि निम्नलिखित परिस्थितियों को ध्यान में रखा जाए तो कर्मचारी प्रदर्शन की तुलना करें (Halsey Scheme) (50% बोनस योजना) या (Rowan Scheme) के अंतर्गत। निम्नलिखित डेटा के साथ गणना करें: पूर्व प्रदर्शन 1,975 घंटे, प्रशिक्षण समय 24, अन्य कारक 36, कुल 6(120) घंटाएं

Accepted Answer

**Note:** The question data appears garbled in transmission. Standard assumed data used: Standard Time (ST) = 120 hours, Actual Time (AT) = 80 hours, Wage Rate (R) = ₹5 per hour. The methodology and comparison are fully exam-compliant.

**Part (a): Calculation of Earnings, Effective Hourly Rate, and Efficiency**

**Common Data:**
- Standard Time (ST) = 120 hours
- Actual Time (AT) = 80 hours
- Time Saved (TS) = ST − AT = 120 − 80 = **40 hours**
- Efficiency = (ST / AT) × 100 = (120 / 80) × 100 = **150%**

**Under Halsey Scheme (50% Bonus Plan):**

The **Halsey Scheme** rewards the worker with 50% of the wages of time saved as bonus. Formula: Total Earnings = (AT × R) + 50% × (TS × R)

- Time Wages = 80 × ₹5 = ₹400
- Bonus = 50% × 40 × ₹5 = ₹100
- **Total Earnings = ₹500**
- **Effective Hourly Rate** = ₹500 / 80 = **₹6.25 per hour**
- **Efficiency = 150%**

**Under Rowan Scheme:**

The **Rowan Scheme** calculates bonus as the proportion of time saved to standard time, applied to actual time wages. Formula: Bonus = (TS / ST) × AT × R

- Time Wages = 80 × ₹5 = ₹400
- Bonus = (40 / 120) × 80 × ₹5 = (1/3) × ₹400 = ₹133.33
- **Total Earnings = ₹533.33**
- **Effective Hourly Rate** = ₹533.33 / 80 = **₹6.67 per hour**
- **Efficiency = 150%**

**Part (b): Comparative Analysis of Halsey and Rowan Schemes**

**Comparison Table:**

| Particulars | Halsey (50%) | Rowan |
|---|---|---|
| Time Wages | ₹400 | ₹400 |
| Bonus | ₹100 | ₹133.33 |
| Total Earnings | ₹500 | ₹533.33 |
| Effective R…

Question 8

निम्नलिखित परिस्थितियों के अनुसार अप्रैल मास 2020 के लिए कोस्टिंग विश्लेषण करें। कंपनी का डेटा: 1 अप्रैल 2020 को ₹25,000 माल, ₹20,000 कार्य, ₹50,000 निर्मित माल, विभिन्न खर्चे दिए गए हैं। 30 अप्रैल 2020 को: ₹[amounts as per table]

Accepted Answer

**Note:** The data table referenced in the question appears incomplete (closing stock values and expense details were not fully specified). The solution below uses the given opening stock figures (Raw Materials ₹25,000; WIP ₹20,000; Finished Goods ₹50,000) and standard assumed data typical of this question type, to demonstrate the complete methodology required at CA Intermediate level.

**Statement of Cost for April 2020**

**(i) Prime Cost / Direct Cost:**
Prime Cost consists of **Direct Material + Direct Labour + Direct Expenses**. Raw Material Consumed = Opening Stock (₹25,000) + Purchases (₹1,40,000) − Closing Stock (₹20,000) = ₹1,45,000. Adding Direct Wages ₹75,000 and Direct Expenses ₹5,000, **Prime Cost = ₹2,25,000**.

**(ii) Works Cost / Factory Cost:**
Works Cost = Prime Cost + Factory/Works Overheads ± WIP Adjustment. Prime Cost ₹2,25,000 + Factory Overheads ₹35,000 = ₹2,60,000. Add Opening WIP ₹20,000 and deduct Closing WIP ₹18,000. **Works Cost = ₹2,62,000**. This represents the total cost of manufacturing goods during April 2020.

**(iii) Cost of Goods Sold (COGS):**
Cost of Goods Sold = Works Cost + Opening Finished Goods − Closing Finished Goods. Works Cost ₹2,62,000 + Opening Finished Goods ₹50,000 = ₹3,12,000 − Closing Finished Goods ₹42,000. **Cost of Goods Sold = ₹2,70,000**. Total **Cost of Sales** = COGS + Office & Admin Overheads ₹15,000 + Selling & Distribution Overheads ₹12,000 = **₹2,97,000**.

**(iv) Profit / Loss:**
Sales Revenue = ₹3,20,000. Cost o…

Question 9

Z Ltd is working by employing 50 skilled workers. It is considering the introduction of an incentive scheme – either Halsey Scheme (with 50% of bonus) or Rowan Scheme – of wage payment for increasing labour productivity to adjust with the increasing demand for its products at 40%. The company feels that if the proposed incentive scheme could bring about an average 20% increase in workers' earnings of the workers, it could act as sufficient incentive for them to produce more and the company has accordingly given assurance to the workers. Because of this assurance, an increase in productivity has been observed in the figures for the month of April, 2024.

Accepted Answer

**Statement of Basic Data:**

Total working hours per worker per month = 24 days × 8 hours = **192 hours**
Total hours available for 50 workers (Time Taken) = 50 × 192 = **9,600 hours**
Time Allowed for actual production = 6,120 units × 1.975 hrs = **12,087 hours**
Time Saved = 12,087 − 9,600 = **2,487 hours**

**Normal Earnings (without incentive):**
Earnings per worker = 192 × ₹50 = **₹9,600 per month**
Total normal wages = 9,600 hrs × ₹50 = **₹4,80,000**
Target earnings (with 20% increase) = ₹9,600 × 1.20 = **₹11,520 per worker**

**Under Halsey Scheme (50% Bonus):**
Bonus = 50% × Time Saved × Hourly Rate = 50% × 2,487 × ₹50 = **₹62,175**
Total Earnings = ₹4,80,000 + ₹62,175 = **₹5,42,175**
Earnings per worker = ₹5,42,175 ÷ 50 = **₹10,843.50**
% Increase = (₹10,843.50 − ₹9,600) ÷ ₹9,600 × 100 = **12.95%**
Labour cost per unit = ₹5,42,175 ÷ 6,120 = **₹88.59 per unit**

Conclusion for Halsey: Earnings increase of **12.95% < 20%** — the assured 20% increase is **NOT achieved**. Halsey Scheme is **not suitable**.

**Under Rowan Scheme:**
Bonus = (Time Saved ÷ Time Allowed) × Time Taken × Hourly Rate
Bonus = (2,487 ÷ 12,087) × 9,600 × ₹50 = **₹98,764 (approx.)**
Total Earnings = ₹4,80,000 + ₹98,764 = **₹5,78,764**
Earnings per worker = ₹5,78,764 ÷ 50 = **₹11,575.28**
% Increase = (₹11,575.28 − ₹9,600) ÷ ₹9,600 × 100 = **20.58%**
Labour cost per unit = ₹5,78,764 ÷ 6,120 = **₹94.57 per unit**

Conclusion for Rowan: Earnings increase of **20.58% > 20%** — the assured 20% increase …

Question 10

Compute the total income and tax payable by Mr. Krishna for the assessment year 2020-21.

Accepted Answer

**Note:** The question appears to be incomplete — the main income details (P&L account/business profits) are not provided. The answer below addresses all specific items given and presents the tax computation framework.

**Assessment Year:** 2020-21 | **Previous Year:** 2019-20

**Point 2 — Depreciation on Car (Section 32 of the Income Tax Act 1961):**
Mr. Krishna purchased a car for ₹12,00,000 on 1st September 2019 and put it to use on the same date. No depreciation was recorded in books. Since the period from 1st September 2019 to 31st March 2020 is 213 days (exceeding 180 days), **full depreciation** is admissible at 15% (rate for motor cars). Allowable depreciation = **₹1,80,000**. Since Point 1 states books follow IT depreciation rates but no depreciation was taken on this car, this ₹1,80,000 is an allowable deduction in computing business income.

**Point 3 — Capital Gains:**

**(a) CGAS amount from sale dated 30th March 2017 (Section 54(2)):**
Mr. Krishna had claimed exemption u/s 54 by depositing ₹25,00,000 in the Capital Gains Account Scheme (CGAS). The time limit for construction of a residential house is **3 years** from the date of transfer, i.e., 3 years from 30th March 2017 = 30th March 2020. He withdrew the amount on 25th March 2020 and invested in construction of an **office house** (commercial property). Section 54 mandates investment in a **residential house property** only. Since the CGAS amount was utilised for a non-qualifying purpose (office house), the e…

Question 11

Two manufacturing companies A and B are planning to merge. The details are as follows:

| | A | B |
|---|---|---|
| Capacity utilisation (%) | 90 | 60 |
| Sales (₹) | 63,00,000 | 48,00,000 |
| Variable Cost (₹) | 39,60,000 | 22,50,000 |
| Fixed Cost (₹) | 13,00,000 | 15,00,000 |

Assuming that the proposal is implemented, calculate:
(i) Break-Even sales of the merged plant and the capacity utilization at that stage.
(ii) Profitability of the merged plant at 80% capacity utilization.
(iii) Turnover of the merged plant to earn a profit of ₹60,00,000.
(iv) When the merged plant is working at a capacity to earn a profit of ₹60,00,000, what percentage of increase in selling price is required to sustain an increase of 5% in fixed overheads.

Accepted Answer

**Step 1 — Establish Merged Plant Data at 100% Capacity**

To analyse the merged entity, individual companies must first be restated at 100% capacity, since A operates at 90% and B at 60%.

Company A at 100%: Sales = ₹63,00,000 ÷ 0.90 = **₹70,00,000**; Variable Cost = ₹39,60,000 ÷ 0.90 = ₹44,00,000; Contribution = ₹26,00,000.

Company B at 100%: Sales = ₹48,00,000 ÷ 0.60 = **₹80,00,000**; Variable Cost = ₹22,50,000 ÷ 0.60 = ₹37,50,000; Contribution = ₹42,50,000.

**Merged Plant at 100% Capacity:** Total Sales = ₹1,50,00,000 | Total VC = ₹81,50,000 | Total Contribution = ₹68,50,000 | Total Fixed Cost = ₹13,00,000 + ₹15,00,000 = **₹28,00,000** | **P/V Ratio = 68,50,000 ÷ 1,50,00,000 = 45.67%**

**(i) Break-Even Sales and Capacity Utilisation**

Break-Even Sales = Fixed Cost ÷ P/V Ratio = ₹28,00,000 ÷ 45.67% = **₹61,31,387 (approx.)**

Capacity at BEP = ₹61,31,387 ÷ ₹1,50,00,000 × 100 = **40.88%**

Alternatively expressed as a ratio: FC ÷ Contribution at 100% = 28,00,000 ÷ 68,50,000 = 56/137 = 40.88% ✓

**(ii) Profitability at 80% Capacity**

Sales at 80% = ₹1,50,00,000 × 80% = ₹1,20,00,000. Contribution = ₹68,50,000 × 80% = ₹54,80,000. Less: Fixed Cost = ₹28,00,000. **Profit = ₹26,80,000.**

**(iii) Turnover to Earn Profit of ₹60,00,000**

Required Sales = (Fixed Cost + Target Profit) ÷ P/V Ratio = (₹28,00,000 + ₹60,00,000) ÷ 45.67% = ₹88,00,000 ÷ 45.67% = **₹1,92,70,073 (approx.)**

Note: This equals approximately 128.47% of the merged plant's 100% capacity (₹1,50,00,000), ind…

Question 12

(a) During the previous year 2019-20, following transactions took place in respect of Mr. Raghav who is 50 years old. [Detailed case scenario with sub-parts (i), (ii), (iii), (iv), (v), (vi) covering two house properties, property transfer, rental income, shareholding, partnership firm, preference shares, and other income sources.]

(b) Discuss the taxability of the following transactions giving reasons, in the light of relevant provisions, for your conclusion. Attempt any two out of the following three parts:

Accepted Answer

The income received by Mr. Rajpal from sub-letting the land to Mr. Manish is taxable as **income from house property** under Section 22 of the Income Tax Act, 1961. The fact that Mr. Manish uses the land for agricultural activities (grazing cattle) does not change the classification of Mr. Rajpal's income, as Mr. Rajpal himself is not conducting agricultural operations.

**Annual Value of Property**: The rent received from Mr. Manish constitutes the annual value = ₹11,500 p.m. × 12 = ₹1,38,000 p.a.

**Allowable Deductions under Section 24**: For a let-out house property, the following deductions are permitted: (1) **30% standard deduction** of annual value for repairs, maintenance, insurance, and collection expenses = 30% of ₹1,38,000 = ₹41,400; (2) **Interest on capital borrowed** for acquisition/improvement (if any).

**Non-Allowable Deduction**: Mr. Rajpal **cannot claim deduction of the ₹10,000 monthly rent** (₹1,20,000 p.a.) paid to Ms. Shilpa. This constitutes ground rent or lease rent paid to the superior lessor. **Section 23 of the Income Tax Act, 1961, explicitly does not permit deduction of rent or ground rent** paid on the property. The rationale is that ground rent relates to the cost of the lease acquisition, not an expense incurred in earning rental income from the property. Ground rent is the consideration paid for the lease rights, not an operational expense.

**Taxable Income Computation**: Annual Value ₹1,38,000 less 30% deduction ₹41,400 = **Net Taxable Inc…

Question 13

Mr. Pratham, a non-resident in India, received a sum of ₹ 1,14,000 from Mr. Rakesh, a resident and ordinarily resident in India. The amount was paid to Pratham on account of transfer of right to use the manufacturing process developed by Mr. Pratham. The manufacturing process was developed by Mr. Pratham in Singapore and Mr. Rakesh uses such process for his business carried on by him in Dubai.

Accepted Answer

The income of ₹1,14,000 is **NOT taxable in India** for Mr. Pratham.

**Analysis:**

**1. Classification as Royalty:** Under Section 9(1)(vi) of the Income Tax Act, 1961, royalty includes payment received for the transfer of right to use a patent, process, design, formula, or manufacturing process. The ₹1,14,000 paid for the right to use the manufacturing process clearly qualifies as royalty income.

**2. Source of Royalty Income:** The critical provision is Section 9(1)(vi), which deems royalty to be income from India only if:
   (a) The property is used in India, OR
   (b) The right to use the property is granted in India

**3. Application to Facts:** The manufacturing process is developed in Singapore and **used in Dubai** for Mr. Rakesh's business. Neither condition for deeming the income as Indian source is satisfied:
   • The property (process) is used in Dubai, not India
   • The right to use is granted for use outside India, not within India
   • Although Mr. Rakesh is a resident and ordinarily resident in India, he exercises the right outside India

**4. Taxability of Non-Residents:** Section 5(2) of the Income Tax Act states that a non-resident is taxable only on income arising or accruing in India or income from Indian sources. Since this royalty income does not have an Indian source, Mr. Pratham is not liable to tax in India on this receipt.

**5. Place of Use is Determinative:** The source of royalty income is determined by the place where the property is actuall…

Question 14

Mr. Nistam grows paddy on land. He then employs mechanical operations on grain to make it fit for sale in the market, like removing hay and chaff from the grain, filtering the grain and finally packing the rice in gunny bags. He claims that entire mechanical operations carried on by him from sale of rice is agricultural income not liable to income-tax since paddy as grown on land is not fit for sale in its original form.

Accepted Answer

Mr. Nistam's claim is **likely to be rejected**. The income from the mechanical operations on paddy would be classified as **non-agricultural income and would be liable to income tax**.

**Relevant Legal Framework:**

**Section 2(1A) of the Income Tax Act, 1961** defines agricultural income as any income derived from land in India by agriculture or by specified processes. However, case law has established a critical distinction: operations that remain **merely ancillary to agriculture** are agricultural, but operations constituting **manufacturing or substantial processing** become non-agricultural.

**Application to Mr. Nistam's Case:**

The operations performed—removing hay and chaff, filtering grain, and packing in gunny bags—constitute **processing operations**, not ordinary agricultural operations. The key issue is whether these operations are incidental to agriculture or constitute manufacturing.

While Mr. Nistam correctly notes that paddy requires processing to be fit for sale, this does not automatically classify the income as agricultural. The distinction lies in the **nature and scale of operations**:

1. **Simple, traditional operations** (like manual winnowing done by farmers as part of ordinary agricultural practice) may remain agricultural if carried on as an integral part of the agricultural process.

2. **Mechanical/commercial processing operations** that substantially transform the raw product constitute manufacturing. The operations here—employing mechanica…

Question 15

Star Ltd, a registered supplier in Karnataka has provided the following details for supply of one machine: List price of Machine supplied (Exclusive of items given below): ₹ 80,000; Tax levied by Local Authority on sale of such machine: ₹ 6,000; Discount of 2.5% on the list price of machine was provided (recorded in the invoice of Machine); Packing expenses for safe transportation charged separately in the invoice: ₹ 4,000. Star Ltd received ₹ 5,000 as subsidy from a NGO on sale of each such machine. The Price of ₹ 80,000 of the machine is after considering such subsidy. During the month of February, 2020, Star Ltd supplied three machines to intra-state customers and one machine to inter-state customers. Star Ltd purchased inputs (intra-state) for ₹ 1,20,000 exclusive of GST for supply to …

Accepted Answer

**Statutory Framework:** Under **Section 15 of the CGST Act, 2017**, the value of a taxable supply is the **transaction value** — the price actually paid or payable — adjusted for inclusions under Section 15(2) and exclusions under Section 15(3).

**Determination of Value of Taxable Supply per Machine:**

The list price of ₹80,000 is the starting point. The following adjustments apply:

**Inclusions under Section 15(2):**
- **Tax levied by Local Authority (₹6,000):** Includible under **Section 15(2)(a)** — any taxes, duties, cesses or fees levied under any law other than GST are included in the transaction value.
- **Packing charges (₹4,000):** Includible under **Section 15(2)(c)** — incidental expenses, including packing, charged by the supplier to the recipient are part of the value.
- **NGO Subsidy (₹5,000):** Includible under **Section 15(2)(e)** — subsidies directly linked to the price received from any person **other than the Central/State Government** must be included. Since the subsidy is from an NGO (non-government entity), and the list price of ₹80,000 is stated to be *after* considering this subsidy, ₹5,000 must be added back to arrive at the true transaction value.

**Exclusion under Section 15(3):**
- **Trade Discount (₹2,000):** Deductible under **Section 15(3)(a)** — a discount of 2.5% on list price (₹80,000 × 2.5% = ₹2,000) is allowed since it is established before/at the time of supply and is specifically recorded in the invoice.

**Value per machine = ₹80,00…

Question 16

Z Ltd manufactures a product. The following data are available:

Required:
(i) Calculate the effective increase in earnings of workers in percentage terms under Haley and Rowan scheme.
(ii) Calculate the savings to Z Ltd in terms of direct labour cost per unit under both the schemes.
(iii) Advise Z Ltd about the selection of the scheme that would fulfil its assurance of incentivising workers and also to adjust with the increase in demand.

Accepted Answer

**Note: The data table referenced in the question ('The following data are available') was not transmitted. The solution below presents the complete methodology, formulas, and decision framework for Haley and Rowan schemes. Once the actual figures are available, substitute them into the steps shown in Working Notes.**

**Halsey Scheme — Key Formulas**

Under the **Halsey Scheme**, the worker receives basic time wages for time taken plus a bonus of **50% of time saved** at the standard wage rate.

Bonus = 50% × Time Saved × Wage Rate per hour

Total Earnings = (Time Taken × Rate) + (50% × Time Saved × Rate)

Effective % increase in earnings = (Bonus ÷ Basic Time Wages) × 100

**Rowan Scheme — Key Formulas**

Under the **Rowan Scheme**, the bonus is a proportion of the time taken wages, where the proportion equals the ratio of time saved to standard time.

Bonus = (Time Saved ÷ Standard Time) × Time Taken × Rate

Total Earnings = (Time Taken × Rate) + [(Time Saved ÷ Standard Time) × Time Taken × Rate]

Effective % increase in earnings = (Bonus ÷ Basic Time Wages) × 100

**Savings to Z Ltd per unit**

Labour cost at standard time (no incentive scheme) = Standard Time × Rate

Labour cost under Halsey = Total Earnings under Halsey

Labour cost under Rowan = Total Earnings under Rowan

Savings per unit (Halsey) = Standard Time Cost − Total Earnings under Halsey

Savings per unit (Rowan) = Standard Time Cost − Total Earnings under Rowan

**Advice to Z Ltd — Selection of Scheme**

Th…

Question 17

The following data are available from the books and records of Q Ltd for the month of April 2020:

Direct Labour Cost = ₹1,20,000 (120% of Factory Overheads)
Cost of Sales = ₹4,00,000
Sales = ₹5,00,000

Accounts show the following figures for 1st April, 2020 and 30th April, 2020:
Inventory - Raw material: 20,000 / 25,000
Work-in-progress: 20,000 / 30,000
Finished goods: 50,000 / 60,000
Other debits - Selling expenses: - / 22,000
General & Admin. expenses: - / 18,000

You are required to prepare a cost sheet for the month of April 2020 showing:
(i) Prime Cost
(ii) Works Cost
(iii) Cost of Production
(iv) Cost of Goods sold
(v) Cost of Sales and Profit earned.

Accepted Answer

**Cost Sheet of Q Ltd for the month of April 2020**

**Step 1 — Derive Factory Overheads:**
Direct Labour = 120% of Factory Overheads → Factory Overheads = ₹1,20,000 ÷ 1.20 = **₹1,00,000**

**Step 2 — Work backwards from Cost of Sales to find all cost components:**
Cost of Sales (given) = ₹4,00,000
Less: Selling Expenses = ₹22,000
→ **Cost of Goods Sold = ₹3,78,000**

Cost of Goods Sold = Cost of Production + Opening FG – Closing FG
3,78,000 = Cost of Production + 50,000 – 60,000
→ **Cost of Production = ₹3,88,000**

Cost of Production = Works Cost + General & Admin Overheads
3,88,000 = Works Cost + 18,000
→ **Works Cost = ₹3,70,000**

Works Cost = Prime Cost + Factory Overheads + Opening WIP – Closing WIP
3,70,000 = Prime Cost + 1,00,000 + 20,000 – 30,000
→ **Prime Cost = ₹2,80,000**

Prime Cost = Raw Material Consumed + Direct Labour
2,80,000 = Raw Material Consumed + 1,20,000
→ Raw Material Consumed = **₹1,60,000**

Purchases = Raw Material Consumed – Opening Stock + Closing Stock = 1,60,000 – 20,000 + 25,000 = **₹1,65,000**

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**COST SHEET — Q Ltd (April 2020)**

Opening Stock of Raw Material: ₹20,000
Add: Purchases: ₹1,65,000
Less: Closing Stock of Raw Material: (₹25,000)
**Raw Material Consumed: ₹1,60,000**
Add: Direct Labour: ₹1,20,000
**(i) Prime Cost: ₹2,80,000**

Add: Factory Overheads: ₹1,00,000
Gross Works Cost: ₹3,80,000
Add: Opening Work-in-Progress: ₹20,000
Less: Closing Work-in-Progress: (₹30,000)
**(ii) Works Cost: ₹3,70,000**

Add: General & Administratio…

Question 18

एकीकृत स्वामित्व उत्पादन (हेस्को बिंदु) के संदर्भ में एक परिदृश्य दिया गया है जिसमें ₹ 50,000 की राशि खरीदना एवं राज्य प्रधान कार्य के अनुरूप पा खाते हैं। परिदृश्य में 100 (Beds) और 5 अतिरिक्त बेड हैं। वर्ष 2020 में 365 दिन का परिचालन। 100 कास्ट अतिरिक्त बेड विभिन्न अवधियों के लिए। औद्योगिक शेयर के लिए खरीदा गया ₹ 30,00,000।

Accepted Answer

**Part (a): Analysis of Integrated Ownership Production Scenario (Hospital Costing & Related Party Transactions)**

**A. Hospital Bed Capacity Analysis**

The scenario describes a healthcare facility with **100 regular beds** and **5 additional/extra beds**, operating for **365 days** in the year 2020.

Total bed capacity = 100 + 5 = **105 beds**

Total **Bed-Days Available** (maximum capacity) = 105 beds × 365 days = **38,325 bed-days**

This figure represents the theoretical maximum patient-care capacity of the facility for the year. In hospital costing, bed-days available is the primary cost unit used for computing cost per unit of service.

**B. Cost Per Bed-Day Computation**

The **Related Party Transaction** amount of ₹30,00,000 is treated here as the total cost pool attributable to the facility operations (to the extent it represents fair-market-value expenditure). Additionally, an amount of ₹50,000 represents a specific procurement/purchase cost.

Total cost considered = ₹30,00,000 + ₹50,000 = ₹30,50,000

Cost per bed-day = ₹30,50,000 ÷ 38,325 = **₹79.58 per bed-day** (approximately)

**C. Related Party Transaction Analysis under AS 18**

Under **AS 18 (Related Party Disclosures)** issued by ICAI, the transaction of ₹30,00,000 between related parties must be disclosed in the financial statements. The key disclosure requirements are:

(i) **Nature of relationship** between the transacting parties must be identified (e.g., subsidiary, associate, key management personnel…

Question 19

State how the following items are treated in arriving at the value of cost of material purchased: (i) Detention Charges/Fines, (ii) Demurrage, (iii) Cost of Returnable containers, (iv) Central Goods and Service Tax (CGST), (v) Shortage due to abnormal reasons.

Accepted Answer

The following is the treatment of the given items in arriving at the **value of cost of material purchased**, as per **CAS-6 (Cost Accounting Standard on Material Cost)** issued by the Institute of Cost Accountants of India and ICAI Cost Accounting study material:

**(i) Detention Charges / Fines**

Detention charges are levied when railway wagons, trucks, or containers are held beyond the permitted free time for loading or unloading. These charges arise due to **inefficiency or negligence** on the part of the buying organisation and are therefore **avoidable in nature**. Since they do not add any value to the material purchased, detention charges and fines are **NOT included in the cost of material purchased**. They are treated as a **period cost** and charged to the **Costing Profit & Loss Account** as an abnormal/avoidable expense.

**(ii) Demurrage**

Demurrage refers to charges levied by shipping companies, port authorities, or carriers for the **delay in loading or unloading** of goods beyond the stipulated free time at a port or railway siding. Like detention charges, demurrage arises on account of **delay and inefficiency** and is an avoidable cost. It does not form part of the cost of acquiring the material. Therefore, demurrage charges are **NOT included in the cost of material purchased** and are written off to the **Costing Profit & Loss Account** as an abnormal loss.

**(iii) Cost of Returnable Containers**

Returnable containers (such as gas cylinders, drums, or…

Question 20

Satya Sai Residents Welfare Association, a registered person under GST has furnished an application for amending return for supplies to first persons for common use of its members. The Association purchased a water pump for ₹ 7,500 (including GST of ₹ 7,000) and availed input services for ₹ 23,600 (inclusive of GST) for common use of members during February 2020. Compute the total GST payable, if any, by Satya Sai Residents Welfare Association, for February 2020. GST rate is 18%. All transactions are intra-state. There is no opening ITC and all conditions for ITC are fulfilled.

Accepted Answer

**Answer: GST Payable = ₹Nil**

**Calculation of Input Tax Credit (ITC):**

Water Pump: The invoice shows a purchase price that includes GST. Interpreting the stated amount as base cost ₹7,500 (with the GST figure appearing to contain a typographical error), GST at 18% = ₹7,500 × 18% = ₹1,350. ITC claimable = **₹1,350**.

Input Services: Total amount inclusive of GST = ₹23,600. Base amount = ₹23,600 ÷ 1.18 = ₹20,000. GST component = ₹23,600 − ₹20,000 = ₹3,600. ITC claimable = **₹3,600**.

Total ITC = ₹1,350 + ₹3,600 = **₹4,950**.

**Treatment for Residents Welfare Association:**

For a Residents Welfare Association making supplies to members for common use of amenities (water supply, maintenance services, etc.), the GST treatment typically falls into one of two scenarios:

*Scenario 1 - Exempt Supplies:* Supplies of essential utilities and common services to members are generally **exempt from GST** under the GST regime. When output supplies are exempt, **ITC cannot be claimed** per Section 16 of the Central Goods and Services Tax Act, 2017, which restricts ITC to goods/services used in making **taxable supplies**. Therefore, GST payable = ₹Nil.

*Scenario 2 - Taxable Supplies at Cost:* If the association's supplies are treated as taxable supplies (and the condition "all conditions for ITC are fulfilled" suggests eligibility here), the association would make taxable supplies to members. As a non-profit entity providing cost-recovery services, the value of supplies provided to…

Question 21

Aristo Agro Services, a registered person provides the following information relating to activities during the month of February 2020: Gross Receipts from - Services relating to rearing of sheeps; Services by way of artificial insemination of horses: ₹ 4,00,000; Processing of Sugarcane into Jaggery: ₹ 6,00,000; Milling of paddy into rice: ₹ 7,50,000; Services by way of fumigation in a warehouse of Agricultural produce: ₹ 1,80,000. All the above receipts are exclusive of GST. Compute the value of taxable supplies under GST laws for the month of February, 2020.

Accepted Answer

Under GST law, to compute the value of taxable supplies, we must identify which services are exempt and which are taxable. According to GST Notification 12/2017, Schedule II, the following agricultural services are exempted:

**Services Relating to Rearing of Sheep and Artificial Insemination of Horses (₹4,00,000):** Services of rearing of animals are exempt under Item 5(ii) of the Notification. Similarly, services of artificial insemination of animals are explicitly exempt under Item 5(iii). These services do not constitute boarding or personnel engagement, hence both fall squarely within the exemption. This amount is **NOT taxable**.

**Processing of Sugarcane into Jaggery (₹6,00,000):** Services in relation to processing of agricultural produce are exempt under Item 5(vii) of GST Notification 12/2017. Processing sugarcane into jaggery is clearly a processing service of agricultural produce and is therefore **EXEMPT**.

**Milling of Paddy into Rice (₹7,50,000):** Services by way of milling of cereals are explicitly exempted under Item 5(vi) of the Notification. Milling of paddy falls within this category and is therefore **EXEMPT**.

**Fumigation in Warehouse of Agricultural Produce (₹1,80,000):** Fumigation or pest control services are not covered under the exempted agricultural services listed in the Notification. While the service relates to agricultural produce, it is a preservation/storage service, not a production, rearing, processing, or milling service. Fumigation i…

Question 22

ABC Cinemas, a registered person engaged in making supply of services by way of provision to exhibition of cinematograph films in multiplexes screens was issuing consolidated tax invoice for supplies at the close of each day in terms of section 31(3)(c) of CGST Rules, 2017. During the month of October 2019, the Department initiated appropriate objection for this matter and asked to issue separate tax invoices for each ticketed. Advise ABC Cinemas for the procedure to be followed in the light of recent notification.

Accepted Answer

**Rule 31(3)(c) of CGST Rules, 2017** permits consolidated tax invoices to be issued in cases where it is impracticable to issue invoices at the time of supply. ABC Cinemas was correctly utilizing this provision to issue a single consolidated tax invoice at the close of each business day for all cinema tickets sold during that day.

The Department's objection in October 2019 was based on concerns regarding whether such consolidated invoices fully complied with the mandatory invoicing requirements and whether they provided adequate transactional transparency. The Department initially sought separate invoices for each ticketed transaction.

**CBIC Clarification**: The CBIC subsequently issued clarifications through notifications (including Notification on consolidated invoices issued in 2020) specifically addressing consolidated invoices for cinema and multiplex supplies. These clarifications confirmed that consolidated invoices are **permissible for exhibition of cinematograph films** provided prescribed conditions are met. This regulatory clarification settled the position in ABC Cinemas' favor.

**Procedure ABC Cinemas Should Follow**:

1. **Continue Consolidated Daily Invoices**: ABC Cinemas may continue issuing consolidated tax invoices at the close of each business day, fully compliant with Rule 31(3)(c) CGST Rules, 2017.

2. **Ensure Full Compliance with Rule 31(1)**: The consolidated invoice must contain all mandatory particulars including unique invoice number, specifi…

Question 23

Agent 1988 has agreed to supplier wishes to transport cargo by road between two cities situated at a distance of 368 kilometres. Calculate the GST payable on the supply in terms of section 13(5) of CGST Rules, 2017 for transport of the said cargo, if it is over dimensional cargo or otherwise.

Accepted Answer

**GST Applicability on Transport of Goods:**

Transport of goods by road is a taxable supply under GST. Section 13(5) of CGST Rules, 2017 provides the mechanism for determining the value of supply for transport of goods. For transport exceeding 100 km (including the present 368 km scenario), the value is determined based on the actual consideration charged or payable.

**For Over-Dimensional Cargo (368 km):**

Overdimensional cargo (goods exceeding specified dimensions/weight limits) transporting 368 km remains a taxable supply under GST. The GST rate applicable is **5%** on the transport service. The value for GST purposes is determined as per Section 13(5), being the actual consideration charged. **GST Payable = 5% of the transport consideration.**

**For Normal Cargo (368 km):**

Normal cargo transported over the same 368 km distance is also taxable at **5%** GST under the same valuation rules. **GST Payable = 5% of the transport consideration.**

**Key Point:** There is **no differential GST rate** between over-dimensional and normal cargo transport under current GST rules. Both are subject to the standard 5% GST rate applicable to transport of goods by road. The distinction lies in regulatory requirements (permits, route restrictions, toll exemptions for over-dimensional cargo) rather than GST treatment.

**Calculation Method (assuming consideration of ₹1,00,000 as example):**
GST = 5% × ₹1,00,000 = **₹5,000** (for both categories)

Without the specific consideration amo…

Question 24

The aggregate Turnover of Mr. Prithvi, a registered person for the FY 2018-19 and 2019-20 were 140 lakhs and 170 lakhs respectively. He has not filed the annual return (GSTR-9) under section 44(1) of CGST Act, 2017 before the due date. Discuss the penal provisions, if any, for not filing the returns before the due date.

Accepted Answer

Mr. Prithvi, as a registered person under GST, is required to furnish an annual return (GSTR-9) under **Section 44(1) of CGST Act, 2017** for both FY 2018-19 and FY 2019-20. The statutory due date for filing the annual return is **31st December of the following year** (i.e., 31st December 2019 for FY 2018-19 and 31st December 2020 for FY 2019-20). His failure to file the annual return before the due date attracts **penal provisions under Section 47(1) of CGST Act, 2017**.

**Penalty Provision**: Under Section 47(1) of CGST Act, 2017, if any registered person fails to furnish a return as required, such person shall pay a penalty which may extend to the **higher of (a) amount of tax paid or payable, or (b) ₹25,000**. In Mr. Prithvi's case, the penalty would be determined by comparing his tax liability with ₹25,000 and imposing the higher amount.

**Exception/Relief**: However, **Section 47(1) provides an important proviso**: If the registered person furnishes the return within **thirty days of the due date** and there is **no tax liability** in the return, no penalty shall be payable. This relief is available only if both conditions are simultaneously satisfied—timely filing within the 30-day window AND nil tax liability.

**Applicability to the Given Facts**: Since Mr. Prithvi's aggregate turnover for both years (₹140 lakhs and ₹170 lakhs) exceeds ₹20 lakhs, he is fully liable to file annual returns as a registered person. There is no exemption based on turnover threshold for …

Question 25

XYZ Ltd is engaged in the manufacturing of toys. It can produce 4,20,000 toys at 70% capacity on per annum basis. Company is in the process of determining sales price for the financial year 2020-21. It has provided the following information:

Direct Material: ₹60 per unit
Direct Labour: ₹30 per unit
Indirect Overheads:
  - Fixed: ₹65,50,000 per annum
  - Variable: ₹15 per unit
  - Semi-variable: ₹5,80,000 per annum up to 60% capacity and ₹50,000 for every 5% increase in capacity or part thereof up to 80% capacity and thereafter ₹75,000 for every 10% increase in capacity or part thereof

Company desires to earn a profit of ₹25,00,000 for the year. Company has planned that in the first 6 months factory will operate at 50% capacity for the first 3 months of the year and at 75% of capacity for…

Accepted Answer

**Part (1): Determination of Average Selling Price**

**Step 1 — Establish 100% Capacity:** The company produces 4,20,000 toys at 70% capacity. Therefore, 100% capacity = 4,20,000 ÷ 70% = **6,00,000 toys per annum**.

**Step 2 — Production Plan:** The financial year is divided into three periods (note: the question states 'balance three months' but in context of a 12-month financial year this is interpreted as 6 months; the three periods sum to 12 months).
- Period 1 (Months 1–3, 50% capacity): 6,00,000 × 50% × 3/12 = **75,000 units**
- Period 2 (Months 4–6, 75% capacity): 6,00,000 × 75% × 3/12 = **1,12,500 units**
- Period 3 (Months 7–12, 100% capacity): 6,00,000 × 100% × 6/12 = **3,00,000 units**
- **Total production = 4,87,500 units**

**Step 3 — Variable Cost per Unit:** Direct Material ₹60 + Direct Labour ₹30 + Variable Overhead ₹15 = **₹105 per unit**. Total variable cost = 4,87,500 × ₹105 = **₹5,11,87,500**.

**Step 4 — Semi-Variable Overhead:** The annual cost at each capacity level is built up as follows:
- Base (up to 60%): ₹5,80,000
- At 75% (3 slabs of 5% above 60%): ₹5,80,000 + 3 × ₹50,000 = ₹7,30,000 p.a.
- At 100% (4 slabs up to 80%, then 2 slabs of 10% above 80%): ₹5,80,000 + 4 × ₹50,000 + 2 × ₹75,000 = ₹9,30,000 p.a.

Prorating for each period:
- Period 1: ₹5,80,000 × 3/12 = ₹1,45,000
- Period 2: ₹7,30,000 × 3/12 = ₹1,82,500
- Period 3: ₹9,30,000 × 6/12 = ₹4,65,000
- **Total Semi-Variable = ₹7,92,500**

**Step 5 — Total Cost Statement:**
- Total Variable Cost…

Question 26

Mr. Anarg a famous Author is engaged in supply of services by the way under or permitting the use or enjoyment of a copyright covered under clause (a) of subsection (1) of section 13 of the Copyright Act, 1957 relating to original literary works to a publisher. Explain in brief the conditions under which an Author can choose to pay tax under forward charge.

Accepted Answer

**Forward Charge for Copyright Services** is a mechanism allowing authors to pay GST directly to the government instead of relying on the recipient to discharge tax under reverse charge. Mr. Anarg, as an author supplying original literary works, can opt for forward charge payment under the following conditions:

**1. Supplier Eligibility**: The supplier (author) must be an individual engaged in supply of copyright services. The supply relates to original literary works as covered under Section 13(1)(a) of the Copyright Act, 1957.

**2. Nature of Supply**: The supply should be of copyright services including the use or enjoyment of copyrights in original literary works to a business entity (publisher).

**3. Recipient**: The supply is made to a person engaged in commercial activity or business operations (such as a publisher).

**4. Territorial Requirement**: The supply is made within the taxable territory of India.

**5. Opt-in Mechanism**: The author must explicitly choose to pay tax under forward charge instead of the recipient paying under reverse charge. This is an optional mechanism, not mandatory.

**6. Invoice and Documentation**: The author must issue proper invoices indicating GST payment under forward charge mechanism and maintain records of tax paid.

**7. Direct Tax Payment**: The author directly pays GST to the government at the applicable rate on the supply value, rather than the publisher collecting and remitting tax.

**Key Advantage**: Forward charge simplifi…

Question 27

Under the provision of section 29(1) of CGST Act, 2017 read with rule 21A of CGST Rules, 2017 related to suspension of registration if the registered person has applied for cancellation of registration, what is the period and manner of suspension of registration?

Accepted Answer

When a registered person applies for cancellation of registration under **Section 29(1) of the CGST Act, 2017** read with **Rule 21A of the CGST Rules, 2017**, the tax authorities may suspend the registration. The period and manner of suspension are as follows:

**Period of Suspension:**
The registration is suspended for a period of **30 days from the date of the suspension notice**. However, if the cancellation application is granted before the expiry of 30 days, the registration stands cancelled and the suspension period terminates earlier. If the cancellation is not granted within 30 days, the registration is automatically restored to active status without any further order.

**Manner of Suspension:**

1. **Issuance of Notice**: The proper officer issues a notice of suspension under Rule 21A, specifying the effective date from which the suspension shall take effect.

2. **Effect from Specified Date**: The suspension becomes effective from the date specified in the suspension notice, which is communicated to the suspended registered person.

3. **Restrictions During Suspension**: During the suspension period, the registered person:
   - Cannot make any supply of goods or services
   - Cannot issue invoices or credit notes
   - Cannot claim input tax credit (ITC)
   - Cannot file GST returns
   - Remains liable for statutory obligations on pre-suspension transactions

4. **Portal Update**: The GST portal is updated to reflect the suspended status of the registration, visible…

Question 28

Explain the circumstances under which proper officer can cancel the registration on his own of a registered person under CGST Act, 2017.

Accepted Answer

A proper officer can cancel the registration of a registered person on his own motion (ex-officio cancellation) under **Section 29(2) of the Central Goods and Services Tax Act, 2017** in the following circumstances:

**1. Ineligibility**: When the person has become ineligible for registration under Sections 22 or 24 of the CGST Act. This includes persons whose turnover falls below the registration threshold or those no longer qualifying as eligible persons under the law.

**2. Not an Eligible Person**: When the person is not an eligible person as originally defined in Sections 22 or 24. This means the registration was granted to someone who should not have qualified in the first place.

**3. Fraud or Misrepresentation**: When the registration has been obtained by means of fraud, misrepresentation, or suppression of material facts. The proper officer may act on evidence that the person submitted false or incomplete information to obtain registration.

**4. Non-engagement in Business**: When the person has not engaged in any actual business activity for a continuous period exceeding **three months**. This applies even if the person remains technically eligible, indicating dormancy or abandonment of business.

**5. Incorrect or False Information**: When the person has furnished information or returns which are found to be incorrect, false, or incomplete during the course of scrutiny, audit, or any verification by the proper officer. This extends to information that contradicts e…

Question 29

A company processes a basic raw material into three finished products using a single process. There were no opening and closing inventories of basic raw materials at the beginning as well as at the end of the year. All finished goods inventory was complete as to processing. The company uses the Net-realizable value method of allocating joint costs.

You are required to prepare:
(i) Schedule showing the allocation of joint costs.
(ii) Calculate the Cost of goods sold of each product and the cost of each item in inventory.
(iii) A comparative statement of Gross profit.

Accepted Answer

**Note:** The question does not include the numerical data table. The solution below uses assumed illustrative data consistent with ICAI Study Material patterns. The methodology and formats are fully exam-applicable.

**Assumed Data:**
Joint Cost incurred = ₹2,70,000

| Product | Output (kg) | Units Sold (kg) | Closing Stock (kg) | Selling Price (₹/kg) | Separable Costs (₹) |
|---------|-------------|-----------------|-------------------|----------------------|---------------------|
| A | 9,000 | 7,500 | 1,500 | 60 | 90,000 |
| B | 6,000 | 4,000 | 2,000 | 80 | 60,000 |
| C | 3,000 | 2,500 | 500 | 120 | 30,000 |

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**(i) Schedule of Joint Cost Allocation — NRV Method**

Under the **Net Realisable Value (NRV) method**, joint costs are allocated in proportion to the NRV of each product. NRV = Total Sales Value (at split-off or final selling price) **minus** Separable (Further Processing) Costs, computed on total output.

| Product | Total Sales Value (₹) | Separable Costs (₹) | NRV (₹) | Ratio | Joint Cost Allocated (₹) |
|---------|----------------------|---------------------|---------|-------|-------------------------|
| A | 5,40,000 | 90,000 | 4,50,000 | 15 | 1,01,250 |
| B | 4,80,000 | 60,000 | 4,20,000 | 14 | 94,500 |
| C | 3,60,000 | 30,000 | 3,30,000 | 11 | 74,250 |
| **Total** | **13,80,000** | **1,80,000** | **12,00,000** | **40** | **2,70,000** |

Allocation Ratio: 4,50,000 : 4,20,000 : 3,30,000 = **15 : 14 : 11**

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**(ii) Cost of Goods Sold and Cost per Item in…

Question 30

ABC Ltd. manufactures three products X, Y and Z using the same plant and resources. It has given the following information for the year ended on 31st March, 2020:

Production Quantity (units): X = 1200, Y = 1440, Z = 1968

Cost per unit (₹):
Direct Material: X = 90, Y = 84, Z = 176
Direct Labour: X = 18, Y = 20, Z = 30

Budgeted direct labour hour rate was ₹4 per hour and the production overheads, shown in table below, were absorbed by products using direct labour hour rate. Company followed Absorption Costing Method. However, the company is now considering adopting Activity Based Costing Method.

Budgeted Overheads and Cost Drivers:
Material Procurement: ₹50,000 - Cost Driver: No. of Orders (25 orders for each product)
Set-up: ₹40,000 - Cost Driver: No. of Production Runs (All three produ…

Accepted Answer

**Activity Based Costing vs. Absorption Costing — ABC Ltd.**

**Step 1: Determine Cost Driver Quantities**

All three products are produced in production runs of 48 units each. Therefore:
- **Production Runs:** X = 1200 ÷ 48 = **25 runs**; Y = 1440 ÷ 48 = **30 runs**; Z = 1968 ÷ 48 = **41 runs**; Total = 96 runs
- **No. of Inspections** (one per run): X = 25, Y = 30, Z = 41; Total = 96
- **No. of Orders** (Material Procurement): X = 25, Y = 25, Z = 25; Total = 75
- **Maintenance Hours** (ratio 1:1:2 of 6,400 hrs): X = 1,600, Y = 1,600, Z = 3,200

**Step 2: Compute ABC Cost Driver Rates**

| Activity | Budgeted Overhead (₹) | Cost Driver Total | Rate |
|---|---|---|---|
| Material Procurement | 50,000 | 75 orders | ₹666.67 per order |
| Set-up | 40,000 | 96 runs | ₹416.67 per run |
| Quality Control | 28,240 | 96 inspections | ₹294.17 per inspection |
| Maintenance | 1,28,000 | 6,400 hours | ₹20.00 per hour |

**Step 3: Overhead Allocation under ABC (₹)**

| Activity | X | Y | Z |
|---|---|---|---|
| Material Procurement | 16,666.67 | 16,666.67 | 16,666.67 |
| Set-up | 10,416.67 | 12,500.00 | 17,083.33 |
| Quality Control | 7,354.17 | 8,825.00 | 12,060.83 |
| Maintenance | 32,000.00 | 32,000.00 | 64,000.00 |
| **Total Overhead** | **66,437.51** | **69,991.67** | **1,09,810.83** |
| Units Produced | 1,200 | 1,440 | 1,968 |
| **Overhead per unit (₹)** | **55.36** | **48.61** | **55.80** |

**Step 4: Total Cost per Unit under ABC (₹)**

| Element | X | Y | Z |
|---|---|---|---|
|…

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