CA Inter Taxation — Question Paper — November 2023

Part (i): Statement of Apportionment of Joint Cost using NRV Method

Under the Net Realisable Value (NRV) Method, joint costs are apportioned in the ratio of the NRV of each product at the split-off point. NRV is computed as: Final Selling Price × Units Produced − Further Processing Costs. For products sold at split-off without further processing, the split-off selling price itself represents NRV.

Product A: NRV = (3,60,000 × ₹9.50) − ₹8,60,000 = ₹34,20,000 − ₹8,60,000 = ₹25,60,000

Product B: NRV = 2,10,000 × ₹6 = ₹12,60,000 (sold at split-off, no further processing)

Product C: NRV = (4,50,000 × ₹12) − ₹10,40,000 = ₹54,00,000 − ₹10,40,000 = ₹43,60,000

Total NRV = ₹81,80,000

Apportionment Ratio: A : B : C = 25,60,000 : 12,60,000 : 43,60,000 = 256 : 126 : 436

Joint Cost apportioned (₹57,26,000):
- Product A = (256/818) × ₹57,26,000 = ₹17,92,000
- Product B = (126/818) × ₹57,26,000 = ₹8,82,000
- Product C = (436/818) × ₹57,26,000 = ₹30,52,000
- Total = ₹57,26,000 ✓

Part (ii): Advise on Offers from D Limited (Product A) and PQR Limited (Product C)

The relevant decision criterion is: accept the split-off offer only if the split-off price exceeds the NRV from further processing (i.e., incremental revenue from further processing > incremental cost).

Product A — Offer from D Limited @ ₹7 per unit:

Revenue if sold at split-off = 3,60,000 × ₹7 = ₹25,20,000
NRV if processed further = ₹25,60,000 (computed above)
Incremental gain from further processing = ₹25,60,000 − ₹25,20,000 = ₹40,000

Since further processing yields ₹40,000 more than the offer, the offer from D Limited should be REJECTED. Product A should be processed further.

Product C — Offer from PQR Limited @ ₹6 per unit:

Revenue if sold at split-off = 4,50,000 × ₹6 = ₹27,00,000
NRV if processed further = ₹43,60,000 (computed above)
Incremental gain from further processing = ₹43,60,000 − ₹27,00,000 = ₹16,60,000

Since further processing yields ₹16,60,000 more than the offer, the offer from PQR Limited should be REJECTED. Product C should be processed further.

Conclusion: Both offers should be rejected as processing further results in higher net realisable value for both products A and C.

Process A Account

The total cost charged to Process A comprises: Input Material (78,000 kg × ₹5) = ₹3,90,000; Wages = ₹2,85,000; Overhead = ₹1,67,400. Total cost = ₹8,42,400.

Normal Loss = 7,800 kgs (no realizable value, so ₹0).
Expected (Normal) Output = 78,000 − 7,800 = 70,200 kgs.
Actual Output = 68,640 kgs.
Abnormal Loss = 70,200 − 68,640 = 1,560 kgs.

Cost per kg = Total Cost ÷ Normal Output = ₹8,42,400 ÷ 70,200 = ₹12 per kg.

Output transferred to Process B = 68,640 × ₹12 = ₹8,23,680.
Abnormal Loss = 1,560 × ₹12 = ₹18,720.

Process A Account

| Dr | | Kgs | ₹ | Cr | | Kgs | ₹ |
|---|---|---|---|---|---|---|---|
| To Input Material | | 78,000 | 3,90,000 | By Normal Loss | | 7,800 | — |
| To Wages | | — | 2,85,000 | By Abnormal Loss | | 1,560 | 18,720 |
| To Overhead | | — | 1,67,400 | By Process B A/c (Transfer) | | 68,640 | 8,23,680 |
| Total | | 78,000 | 8,42,400 | Total | | 78,000 | 8,42,400 |

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Process B Account

The total cost charged to Process B: Transfer from Process A = ₹8,23,680; Indirect Material = ₹34,320; Wages = ₹3,30,000; Overhead = ₹1,11,600. Total cost = ₹12,99,600.

Normal Loss = 240 kgs (no realizable value, so ₹0).
Expected Output = 68,640 − 240 = 68,400 kgs.
Actual Output = 69,000 kgs.
Since actual output exceeds expected output, there is an Abnormal Gain = 69,000 − 68,400 = 600 kgs.

Cost per kg = Total Cost ÷ Expected Output = ₹12,99,600 ÷ 68,400 = ₹19 per kg.

Finished Stock (Output) = 69,000 × ₹19 = ₹13,11,000.
Abnormal Gain = 600 × ₹19 = ₹11,400 (appears on Debit side of Process B account).

Process B Account

| Dr | | Kgs | ₹ | Cr | | Kgs | ₹ |
|---|---|---|---|---|---|---|---|
| To Process A A/c | | 68,640 | 8,23,680 | By Normal Loss | | 240 | — |
| To Indirect Material | | — | 34,320 | By Finished Stock A/c | | 69,000 | 13,11,000 |
| To Wages | | — | 3,30,000 | | | | |
| To Overhead | | — | 1,11,600 | | | | |
| To Abnormal Gain A/c | | 600 | 11,400 | | | | |
| Total | | 69,240 | 13,11,000 | Total | | 69,240 | 13,11,000 |

Summary: Process A has an Abnormal Loss of 1,560 kgs valued at ₹18,720 (transferred to Abnormal Loss Account). Process B has an Abnormal Gain of 600 kgs valued at ₹11,400 (transferred to Abnormal Gain Account). The cost of finished goods transferred from Process B = ₹13,11,000.

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Computation of Business Income (Normal Provisions) — Common to Options (i) and (iii)

Net Profit as per P&L is computed as: Credits (Sales ₹70,80,000 + Closing stock ₹2,10,000 + Rent from HP ₹1,80,000 + Rent from furniture ₹1,20,000 = ₹75,90,000) minus Debits (Opening stock ₹1,15,000 + Purchases ₹55,40,000 + Transport ₹1,20,000 + Salaries ₹3,40,000 + Rates & taxes ₹24,000 + Admin expenses ₹3,25,000 + Depreciation ₹80,000 = ₹65,44,000) = ₹10,46,000.

Starting from ₹10,46,000, the following adjustments are made:

Deduct non-business incomes credited to P&L: Rent from house property ₹1,80,000 (taxable under HP head) and rent from furniture ₹1,20,000 (taxable as Income from Other Sources). Add back disallowed expenses: Municipal taxes ₹7,000 u/s 23 (allowable from HP not business); donation to National Children's Fund ₹25,000 (not business expenditure u/s 37(1)); laptop ₹60,000 — capital expenditure debited to P&L, disallowed; cash transport payment ₹30,000 disallowed under Section 40A(3) of the Income Tax Act 1961 (cash payment exceeding ₹10,000); book depreciation ₹80,000 added back to substitute IT Act depreciation. GST liability ₹5,000 paid on 01.05.2023 — allowed under the proviso to Section 43B as it was paid before the return due date. Loss on equity shares ₹8,000 is not part of P&L (listed only in additional details) — treated as Short-Term Capital Loss (STCL) under Section 111A, to be carried forward for 8 years. Stock corrections: opening stock overvalued by ₹15,000 added back (P&L profit understated); closing stock overvalued by ₹20,000 deducted (P&L profit overstated).

IT Act Depreciation u/s 32: Trade mark value = ₹1,200 ÷ 15% = ₹8,000; correct rate for intangibles = 25%; IT dep = ₹2,000. Other assets: ₹78,800 (assumed same as book). Laptop purchased 15.05.2022 (used > 180 days): ₹60,000 × 40% = ₹24,000. Total IT depreciation = ₹1,04,800.

Business Income (Normal Provisions) = ₹8,38,200

Income from House Property (all options): Rent received ₹1,80,000 = GAV. Less municipal taxes u/s 23: ₹7,000. NAV = ₹1,73,000. Less standard deduction u/s 24(a) @ 30% = ₹51,900. HP Income = ₹1,21,100

Income from Other Sources (all options): Furniture rent = ₹1,20,000

Gross Total Income (Normal Provisions) = ₹10,79,300

Chapter VI-A Deductions (Old Regime only): Section 80C — PPF ₹50,000 + LIC ₹60,000 = ₹1,10,000 (within ₹1,50,000 limit). Section 80E — interest on education loan = ₹70,000 (no ceiling). Section 80G — donation to National Children's Fund @ 100% without qualifying limit = ₹25,000. Total Chapter VI-A = ₹2,05,000.

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(i) Normal Provisions + Section 115BAC (New Regime, AY 2023-24):
Under Section 115BAC, Chapter VI-A deductions (80C, 80E, 80G) are not available. Age-based enhanced exemption does not apply.
Total Income = ₹10,79,300
Tax: Nil + 5% × ₹2,50,000 = ₹12,500 + 10% × ₹2,50,000 = ₹25,000 + 15% × ₹2,50,000 = ₹37,500 + 20% × ₹79,300 = ₹15,860. Tax = ₹90,860. Health & Education Cess @ 4% = ₹3,634.
Tax Payable = ₹94,494

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(ii) Presumptive Taxation u/s 44AD + Old Regime (No 115BAC):
Turnover ₹70,80,000 < ₹2 crore — eligible for Section 44AD. All receipts via account payee cheques/bank transfers → deemed profit @ 6% (digital receipts rate).
Business Income = 6% × ₹70,80,000 = ₹4,24,800
HP Income = ₹1,21,100; Other Sources = ₹1,20,000; GTI = ₹6,65,900
Less Chapter VI-A (80C + 80E + 80G) = ₹2,05,000
Total Income = ₹4,60,900
Tax = 5% × ₹2,10,900 = ₹10,545. Since total income ≤ ₹5,00,000, rebate u/s Section 87A = ₹10,545 (full rebate). Tax after rebate = NIL. HEC = NIL.
Tax Payable = NIL

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(iii) Normal Provisions + Old Regime (No 115BAC):
GTI = ₹10,79,300. Less Chapter VI-A = ₹2,05,000.
Total Income = ₹8,74,300
Tax: Nil + 5% × ₹2,50,000 = ₹12,500 + 20% × ₹3,74,300 = ₹74,860. Tax = ₹87,360. HEC @ 4% = ₹3,494.
Tax Payable = ₹90,854

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Most Advantageous Option: Option (ii) — Presumptive taxation u/s 44AD with Old Regime results in NIL tax payable due to Section 87A rebate, compared to ₹94,494 under Option (i) and ₹90,854 under Option (iii). Mr. Pramod should adopt Option (ii).

Contract Account of Unique Construction Limited as on 31.03.2023

The contract commenced on 01.08.2022 and the account is prepared for 8 months ending 31.03.2023. The notional profit figure emerges from comparing the value of work certified against the cost attributable to that work.

Contract Account (Dr side):

| Particulars | ₹ |
|---|---|
| To Materials consumed | 35,91,000 |
| To Wages (paid ₹9,65,000 + outstanding ₹75,000) | 10,40,000 |
| To Direct expenses | 1,96,650 |
| To General overheads | 2,08,000 |
| To Subcontractor charges (₹18,000 × 40% × 8 months) | 57,600 |
| To Plant issued to site | 7,20,000 |
| To Notional Profit c/d | 4,97,500 |
| Total | 63,10,750 |

Contract Account (Cr side):

| Particulars | ₹ |
|---|---|
| By Plant transferred to other contracts (WDV) | 56,250 |
| By Plant c/d (WDV at 31.03.2023) | 5,94,000 |
| By Work-in-Progress — Work certified (value, 50% of ₹96,00,000) | 48,00,000 |
| By Work-in-Progress — Work uncertified (cost) | 8,60,500 |
| Total | 63,10,750 |

Notional Profit = ₹4,97,500

Note: The 60% completion figure (stated as 31.12.2023 in the question — treated as 31.03.2023, likely a typographical error) is used to apportion total costs between certified and uncertified work. Since only work that has been certified by the architect can give rise to a notional profit, the notional profit represents the surplus of the value of certified work (₹48,00,000) over the cost attributable to it (₹43,02,500).

Note: The question as provided is incomplete — the full case scenario data, including cost per unit and the specific conditions for each item, has not been fully transmitted. The figures given (₹1,40,000; ₹3,40,000; ₹4,20,000; ₹2,70,000 with selling prices ₹20, ₹40, ₹20, ₹20 per unit respectively) and the reference to HL Limited suggest this is an inventory valuation problem under AS 2 (Valuation of Inventories) combined with a bank/accounting treatment question. The framework answer below applies AS 2 principles with the available data.

(a) Accounting Treatment — Inventory Valuation under AS 2:

As per AS 2 (Valuation of Inventories), inventories shall be valued at the lower of Cost or Net Realisable Value (NRV). NRV is the estimated selling price in the ordinary course of business less the estimated costs of completion and estimated costs necessary to make the sale.

From the available data, units in each item are derived by dividing given amount by selling price per unit (assuming the amounts represent total cost at cost price — full data needed to confirm):
- Item (i): ₹1,40,000 ÷ ₹20 = 7,000 units
- Item (ii): ₹3,40,000 ÷ ₹40 = 8,500 units
- Item (iii): ₹4,20,000 ÷ ₹20 = 21,000 units
- Item (iv): ₹2,70,000 ÷ ₹20 = 13,500 units

For each item, if Cost per unit > NRV per unit, inventory must be written down to NRV; the write-down is recognised as an expense in the Statement of Profit & Loss in the period it occurs. If Cost ≤ NRV, inventory is carried at cost. Without cost per unit data, the specific write-down cannot be computed. The student should compare cost vs NRV for each item and select the lower value.

(b) HL Limited — Specific Accounting Treatment:

In the context of HL Limited, if this relates to a Bank Reconciliation Statement (BRS), the following principles apply under AS 2 / general accounting standards:

1. Unpresented cheques (cheques issued but not yet presented to bank): Deduct from bank balance in BRS — no adjustment needed in Cash Book if already recorded.
2. Outstanding deposits (deposits in transit): Add to bank balance in BRS.
3. Bank charges / interest debited by bank but not yet recorded in Cash Book: Deduct from Cash Book balance.
4. Direct credits by bank (e.g., interest credited, direct collections): Add to Cash Book balance.

Journal entries required for items not yet recorded in Cash Book:
- For bank charges: Dr. Bank Charges A/c, Cr. Bank A/c
- For direct deposit/interest: Dr. Bank A/c, Cr. Interest/Income A/c

If the HL Limited question relates to sale of goods with different selling prices, the AS 2 treatment applies as above.

Important disclaimer: Since the complete question data has not been provided (cost prices, specific conditions for each item, and the precise HL Limited scenario are missing), a complete numerical solution cannot be given. Please resubmit the full question with all data for a complete worked solution. The framework above covers the applicable standards and approach correctly.

Note: The question as presented appears to be incomplete. The data provided includes opening stocks, purchases, and freight inward, but critical figures required to compute the Cost of Production are missing — specifically: Closing Stock of Raw Materials, Closing Stock of Work-in-Progress, Direct Wages/Labour, and Factory/Manufacturing Overheads. The answer below demonstrates the standard Cost of Production Statement format with the available figures and indicates where missing data would be inserted.

Statement of Cost of Production for the year ended 31st March, 2023 (Product BXE)

A. Raw Material Consumed:
Opening Stock of Raw Materials: ₹27,00,000
Add: Purchases: ₹2,48,00,000
Add: Freight Inward: ₹7,50,000
Total Material Available: ₹2,82,50,000
Less: Closing Stock of Raw Materials: *(Not given)*
Raw Material Consumed = ₹2,82,50,000 − Closing RM

B. Cost of Production:
Raw Material Consumed: (as above)
Add: Direct Wages/Labour: *(Not given)*
Add: Prime Cost = Raw Material Consumed + Direct Wages
Add: Factory Overheads (Power, Depreciation, etc.): *(Not given)*
= Gross Works Cost
Add: Opening Work-in-Progress: ₹10,60,000
Less: Closing Work-in-Progress: *(Not given)*
= Cost of Production

C. Cost of Goods Sold (for reference):
Cost of Production (above)
Add: Opening Finished Goods: ₹25,00,000
Less: Closing Finished Goods: *(Not given)*
= Cost of Goods Sold

If the question intends only the material cost layer as part (a), and remaining sub-parts provide additional data, then the Raw Material available for consumption (before closing stock adjustment) is ₹2,82,50,000. Students are advised to use the complete data set from the original question paper to arrive at the final Cost of Production figure.

Note: This question is a sub-part of a larger case scenario. The September 2023 actual demand figures (base month) for Hot Coffee, Cold Coffee, and Fruit Juice are required from the preceding part of the case. The selling prices per unit are also needed from prior data. The solution below presents the complete methodology and works through all figures that can be derived from the given data, using the demand relationships specified.

STEP 1 — Demand (Sales in Units) Forecast

The closing stock of September 2023 serves as the opening stock for October 2023. Demand is derived using the given percentage changes applied to the previous month's demand.

Let the September 2023 demand be denoted as the base:
- Hot Coffee increases by 50% each month: Oct = Sep × 1.50; Nov = Oct × 1.50; Dec = Nov × 1.50
- Cold Coffee decreases by 30% each month: Oct = Sep × 0.70; Nov = Oct × 0.70; Dec = Nov × 0.70
- Fruit Juice decreases by 20% in October only, then constant: Oct = Sep × 0.80; Nov = Oct; Dec = Oct
- Carbonated Soft Drink: Given directly — Oct = 60,000; Nov = 50,000; Dec = 30,000

SALES BUDGET (in units)

| Product | October | November | December |
|---|---|---|---|
| Hot Coffee | Sep × 1.50 | Oct × 1.50 | Nov × 1.50 |
| Cold Coffee | Sep × 0.70 | Oct × 0.70 | Nov × 0.70 |
| Fruit Juice | Sep × 0.80 | Same as Oct | Same as Oct |
| Carbonated Soft Drink | 60,000 | 50,000 | 30,000 |

Sales value = Units × Selling Price per unit (unchanged from current quarter — prices to be taken from earlier part of the case).

PRODUCTION BUDGET (in units)

The production budget formula is: Production = Budgeted Sales + Closing Stock − Opening Stock

Opening stock for each month = Closing stock of the previous month (given in the standard quantity table).

Hot Coffee:
- October: Sales(Oct HC) + 15,000 − 12,000
- November: Sales(Nov HC) + 13,000 − 15,000
- December: Sales(Dec HC) + 11,000 − 13,000

Cold Coffee:
- October: Sales(Oct CC) + 14,000 − 13,000
- November: Sales(Nov CC) + 15,000 − 14,000
- December: Sales(Dec CC) + 16,000 − 15,000

Fruit Juice:
- October: Sales(Oct FJ) + 12,000 − 11,000
- November: Sales(Nov FJ) + 10,000 − 12,000
- December: Sales(Dec FJ) + 13,000 − 10,000

Carbonated Soft Drink:
- October: 60,000 + 5,200 − 7,500 = 57,700 units
- November: 50,000 + 6,000 − 5,200 = 50,800 units
- December: 30,000 + 7,000 − 6,000 = 31,000 units

The above framework is complete. To fill in numbers for Hot Coffee, Cold Coffee, and Fruit Juice, substitute the September 2023 demand figures and selling prices from the earlier part of the case scenario into the formulas shown.

Answer: (1) Yes (2) Yes (3) Yes (4) No (5) No (6) No

(1) Hire charges for machinery in India – YES. Under Section 9(1)(v) of the Income Tax Act 1961, income arising from the use of machinery, plant, building, or land situated in India is deemed to accrue or arise in India. The situs (location) of the machinery is determinative; the place of payment is irrelevant. Thus, hire charges for machinery in India constitute income deemed to accrue in India regardless of where payment is made.

(2) Income from cinematograph film shooting in India – YES. Under Section 9(1)(vi), income from the shooting of a cinematograph film in India is explicitly deemed to accrue or arise in India. The location of the activity (shooting in India) is the key factor. The residential status or citizenship of the person earning the income is immaterial. A non-resident non-citizen earning income from film shooting activities in India is liable on such deemed income arising in India.

(3) Capital gain from transfer of house property in India – YES. Under Section 9(1)(iii), capital gain arising from the transfer of immovable property (house property) situated in India is deemed to accrue or arise in India. The place of registration of the property and the place of payment of consideration are not relevant. The situs of the property is the determinative factor. Capital gains from transfer of Indian property are always deemed to accrue in India.

(4) Allowances for services rendered outside India – NO. These allowances are earned for services rendered outside India, so the income arises outside India. Section 9(1)(iv) covers income from salary for services rendered in India. Allowances paid for services rendered outside India do not constitute income deemed to accrue in India, even if paid by the Government. The source of income must be within India for it to be deemed to accrue here.

(5) Past period foreign untaxed income brought to India – NO. While Section 9(1)(vii) deems foreign dividends and foreign interest brought to India to accrue in India, general past period foreign untaxed income is not automatically deemed to accrue in India merely by being remitted or brought into India. Unless the foreign income falls specifically under Section 9(1)(vii) (dividends/interest), it does not qualify as income deemed to accrue in India. Bringing foreign income to India makes it taxable as foreign income in hands of a resident, but it is not deemed to accrue in India.

(6) Gift received on occasion of wedding in India – NO. Gifts are not considered taxable income under Section 56(2)(vii) of the Act (gifts are generally excluded from the definition of income with limited exceptions). Since gifts do not constitute income in the first place, they cannot be income deemed to accrue or arise in India. The receipt of a gift, even by a non-resident on the occasion of a wedding in India, does not give rise to income deemed to accrue in India.

COMPUTATION OF TAXABLE INCOME FOR MR. SANJAY

I. AS NOT ORDINARILY RESIDENT (NOR)

For a NOR under Section 5(1)(b) of the Income Tax Act 1961, taxable income includes: (i) income from any source in India; (ii) income from any source outside India if received in India; (iii) income from business controlled from India (entire income); and (iv) income from profession set up in India (entire income).

1. Interest on England Development Bonds: ₹20,000 - The total interest received is ₹60,000, of which 1/3 is ₹20,000 received in India. As it is foreign income, only the portion received in India is taxable. Taxable: ₹20,000.

2. Interest from Non-Resident: ₹5,000 - This is interest on a loan given to a non-resident to run a business in India. Although the debtor is non-resident, the income originates from the non-resident's Indian business operations. The source is therefore the Indian business, making it Indian income. Taxable: ₹5,000.

3. Royalty from Resident: ₹20,000 - Royalty received from an Indian resident is income from an Indian source. Even though technical services were rendered outside India, the payer being a resident makes it Indian income. Taxable: ₹20,000.

4. Income from Business in Sri Lanka: ₹25,000 - Since the business is controlled from India, the entire income (not just the amount received in India) is taxable under the control and management test. Taxable: ₹25,000.

Total Taxable Income for NOR = ₹70,000

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II. AS NON-RESIDENT (NR)

For a NR under Section 5(1)(a) of the Income Tax Act 1961, taxable income includes only: (i) income from any source in India; and (ii) income from business controlled from India (entire income) or profession set up in India (entire income).

1. Interest on England Development Bonds: ₹0 - Foreign income is NOT taxable for a NR. Even though 1/3 was received in India, foreign source income is excluded for non-residents. Not taxable.

2. Interest from Non-Resident: ₹5,000 - As reasoned above, this is income from the Indian business source (where the business is located and controlled). Taxable: ₹5,000.

3. Royalty from Resident: ₹20,000 - Royalty from an Indian resident is Indian source income. Taxable: ₹20,000.

4. Income from Business in Sri Lanka: ₹25,000 - Since the business is controlled from India, the entire income is taxable. Taxable: ₹25,000.

Total Taxable Income for NR = ₹50,000

The key distinction is that foreign source income is taxable for NOR only if received in India, whereas for NR, only Indian source income is taxable (excluding foreign income even if received in India).

Part (i): TDS on Goods Purchase

No TDS is required on any of the payments made by XYZ to ABC for purchase of fabric material. The transactions consist of: (a) Advance payment of ₹40,00,000 on 1.4.2022; (b) Payment for supplies of ₹20,00,000 on 2.7.2022; and (c) Advance payment of ₹12,00,000 on 4.8.2022. Purchases of goods do not fall under any specific TDS provision under the Income-tax Act, 1961. Section 194C applies to payments for professional/technical services or work contracts. Section 194H applies to commission or brokerage on sale or purchase of goods—not payment for goods supply itself. Section 194J applies to fees for professional services. Since this is a straightforward purchase of goods without any embedded service component, none of these provisions apply. ABC's turnover (₹6 crore in 2021-22) does not trigger any TDS threshold. XYZ's turnover (₹9 crore in 2022-23) does not change the analysis since TDS on goods purchases is not recognized under the Act.

Even if XYZ's ₹4 crore turnover in 2021-22 comprised supplies to charitable organizations, the answer remains the same. The nature of the end-use does not convert a goods purchase transaction into a service transaction. Charitable supplies do not attract separate TDS treatment on the purchase side.

Part (ii): Commission on Sales to Part-Time Director

TDS is required under Section 194H at the rate of 10% for a resident deductee. The amount of commission (₹2,49,000) paid to MJ for the period 01.04.2022 to 31.03.2023 exceeds the threshold of ₹5,000 prescribed under Section 194H. Although MJ is a director, the commission on sales constitutes payment for services rendered in that capacity and falls within the ambit of Section 194H—commission on sale activities. TDS to be deducted: ₹2,49,000 × 10% = ₹24,900. ABZ Pvt. Ltd. must deduct this TDS and deposit it with the Government of India along with the TDS return. MJ would be entitled to credit this TDS against their total income tax liability for AY 2023-24.

Part (iii): Senior Citizen—Income and ITR Filing Requirement

Calculation of Total Income:
- Pension: Monthly pension ₹72,000 × 12 months = ₹8,64,000. Under Section 10(10D), half of the pension of a retired government employee is exempt: ₹8,64,000 ÷ 2 = ₹4,32,000 (exempt). Taxable pension = ₹4,32,000.
- Savings Account Interest: ₹15,000. Under Section 10(11A), a senior citizen (age 60+) can claim exemption of up to ₹10,000 on savings account interest. Taxable interest = ₹15,000 − ₹10,000 = ₹5,000.
- Term Deposit Interest: Principal ₹10,00,000 @ 7% p.a. from 01.07.2022 to 31.03.2023 (9 months) = ₹10,00,000 × 7% × (9÷12) = ₹52,500. Fully taxable (no exemption under Section 10).
- Total Income = ₹4,32,000 + ₹5,000 + ₹52,500 = ₹4,89,500

Tax Liability: Under the pre-115BAC regime (Old Regime), the basic exemption limit for a super-senior citizen aged 80+ for AY 2023-24 is ₹5,00,000. Since Mr. Kumar's total income of ₹4,89,500 is below the exemption threshold, no income tax is payable.

ITR Filing Requirement: Under Section 139(1), an individual is required to file ITR only if total income exceeds the basic exemption limit. Since Mr. Kumar's income (₹4,89,500) falls short of ₹5,00,000, filing of ITR is not mandatory. However, he may file ITR voluntarily under Section 139(9) to establish compliance, especially since he has received pension credited to his bank account and earned interest income.

CAPITAL GAIN CALCULATION

Step 1: Compute Long-Term Capital Gain (LTCG)
Sale price: ₹10,00,000
Less: Brokerage on sale: ₹2,000
Net sale price: ₹9,98,000

Cost of Acquisition (COA): ₹2,00,000
Indexed Cost of Acquisition = COA × (CII of sale year / CII of purchase year)
= 2,00,000 × (331 / 200)
= 2,00,000 × 1.655
= ₹3,31,000

LTCG = Net sale price − Indexed COA
= 9,98,000 − 3,31,000
= ₹6,67,000

APPLICATION OF SECTION 54F

Mr. Aryan is eligible for deduction under Section 54F of the Income Tax Act, 1961 (long-term capital gains from transfer of unlisted shares, excluding listed securities). The conditions are satisfied:
- Amount deposited: ₹5,00,000 on 15.06.2023 (within 6 months from end of FY 2022-23, i.e., by 30.09.2023, and before filing return for AY 2023-24) ✓
- Amount does not exceed LTCG (₹5,00,000 < ₹6,67,000) ✓
- Amount used for purchasing residential house: ₹4,50,000 on 01.05.2024 (within 3 years from end of FY 2023-24, i.e., by 31.03.2027) ✓

Deduction under Section 54F = Amount actually used for purchase = ₹4,50,000

(i) CAPITAL GAIN CHARGEABLE TO TAX FOR AY 2023-24

LTCG = ₹6,67,000
Less: Deduction under Section 54F: ₹4,50,000
Capital Gain chargeable to tax = ₹2,17,000

(ii) TAX TREATMENT OF UNUTILIZED AMOUNT

Unused amount in Capital Gain Account Scheme = ₹5,00,000 − ₹4,50,000 = ₹50,000

Under Section 54F, the amount deposited in the Capital Gain Account Scheme must be used for purchasing/constructing a residential house property within 3 years from the end of the FY in which the deposit was made. The deposit was made in FY 2023-24; therefore, the deadline is 31.03.2027.

If the unutilized amount of ₹50,000 is not used for purchasing/constructing a residential house property by 31.03.2027, it shall be chargeable to tax as capital gain in Assessment Year 2027-28. The amount will form part of the taxable income for AY 2027-28 and be taxed at applicable rates.

Answer: ₹13,58,954

Ms. Neelima's total income for AY 2023-24 comprises taxable amounts from leave encashment, gratuity, and unrecognized provident fund received during the financial year 2022-23 (retirement on 31 December 2022).

Leave Encashment from CD (P) Ltd.: Under Section 10(10AA), leave encashment is exempt to the extent of salary for leave at the employee's credit at the time of retirement. The average monthly salary is calculated from the 11-month period immediately preceding retirement. The amount received (₹4,14,000) exceeds the exempt amount by ₹4,745, which is taxable.

Gratuity from CD (P) Ltd.: Since Ms. Neelima is not covered by the Payment of Gratuity Act, 1972, the exemption under Section 10(10)(vi) is calculated using the formula (1/2) × Last drawn salary × Years of service, which yields ₹1,65,791. The balance of ₹10,34,209 is taxable.

Unrecognized Provident Fund: From the withdrawal of ₹5,20,000, only the employer's contribution (₹2,10,000) and interest earned on both contributions (₹60,000 + ₹50,000 = ₹1,10,000) are taxable. The employee's own contribution (₹2,00,000) is not taxable as it represents a return of capital. Total taxable amount is ₹3,20,000.

Historical amount from LMN Ltd. (1992): The leave salary received in 1992 is not included in AY 2023-24 assessment as it pertains to a prior assessment year.

Taxable Income for FY 2022-23: ₹2,50,000 under the head Income from Other Sources.

Item (i) – Dividend ₹50,000: Dividends from Indian companies are taxable in the year of receipt, not declaration. Since received in April 2022, it is taxable in FY 2022-23. Post abolition of Dividend Distribution Tax (w.e.f. April 1, 2020), dividends are taxable at the assessee's applicable tax slab rate as income from other sources. Taxable amount: ₹50,000 under Section 56.

Item (ii) – Forfeited Advance ₹1,00,000: Earnest money received for a proposed capital asset transfer and forfeited when the deal fell through. Under Section 56(2)(x), any amount received without consideration or for inadequate consideration is taxable in the hands of the recipient. Since the advance was forfeited and retained without the promised transfer of capital asset occurring, it is taxable as income without consideration. Taxable amount: ₹1,00,000 under Section 56(2)(x).

Item (iii) – Cash Gift ₹51,000: Under Section 56(2)(viia), cash gifts received in a financial year exceeding ₹50,000 are taxable to the extent of excess over ₹50,000. The exemption of ₹50,000 applies irrespective of whether the gift is from a relative or non-relative. Taxable amount = ₹51,000 − ₹50,000 = ₹1,000 under Section 56(2)(viia).

Item (iv) – Family Pension ₹99,000: Pension received from the employer of deceased wife (family pension/death benefit pension). Unless specifically exempted under a statute or employer policy, family pensions from private employers are taxable as income from other sources under Section 56. Section 10(10A) provides exemptions primarily for government employees' widow/widower pensions. No exemption is mentioned in the given facts. Taxable amount: ₹99,000 under Section 56.

Total Taxable Income = ₹50,000 + ₹1,00,000 + ₹1,000 + ₹99,000 = ₹2,50,000

Note: The question as presented does not include the product data table referenced by the phrase 'Information related to products for the most recent year is under –'. The answer below explains the complete methodology for the traditional absorption costing system as applicable to JI Plastics Limited. If the data table is available, the same framework should be applied step-by-step.

Traditional Absorption Costing System – Methodology

Under the traditional absorption costing (TAC) system, all production overheads are pooled together into a single cost centre and then absorbed into product costs using a single predetermined overhead absorption rate (OAR), based on a volume-related basis. For JI Plastics Limited, the chosen basis is machine hours, giving an OAR of ₹240 per machine hour.

Step 1 – Compute Production Overhead Absorbed per Unit

For each product, the overhead absorbed per unit is computed as:

Overhead per unit = Machine Hours per unit × ₹240

So, if Product S requires 2 machine hours per unit, Product M requires 3 machine hours per unit, and Product L requires 1 machine hour per unit (illustrative), then:
- Product S: 2 × ₹240 = ₹480 per unit
- Product M: 3 × ₹240 = ₹720 per unit
- Product L: 1 × ₹240 = ₹240 per unit

Step 2 – Compute Total Product Cost per Unit

The total product cost per unit under TAC comprises:

Total Product Cost = Direct Material Cost + Direct Labour Cost + Production Overhead Absorbed

This is applied individually for each of the three products S, M and L using their respective per-unit figures from the data table.

Step 3 – Compute Selling Price per Unit

JI Plastics Limited adds a mark-up of 40% on total product cost to arrive at the selling price:

Selling Price per unit = Total Product Cost per unit × (1 + 40%) = Total Product Cost × 1.40

Limitation of Traditional Absorption Costing

The TAC system uses a single volume-based driver (machine hours) to absorb all overheads, regardless of the actual cost behaviour. This can distort product costs, particularly when:
- Products consume support activities (e.g., set-ups, quality inspection, procurement) in different proportions from their machine hour usage.
- Low-volume, complex products (such as Product L) tend to be under-costed, while high-volume simple products (such as Product S) tend to be over-costed.

This distortion leads to incorrect selling prices and potentially flawed decisions on pricing, product mix, and profitability. This is the primary reason Activity Based Costing (ABC) is often preferred over TAC for multi-product environments.

Conclusion: Under the traditional system, the cost and selling price of each product is a direct function of its machine hour consumption, which may not reflect the true resource demands of each product. The specific numerical computation requires the product data table (direct material, direct labour, and machine hours per unit for S, M and L) which appears to be missing from the question as presented.

Answer: Gross Total Income of Mr. Jai = ₹60,000

Income classification and loss set-off must follow the rules under Sections 70-73, 81, and 192 of the Income Tax Act, 1961.

Business/Profession Income:
Race horse activity (current year ₹40,000 less brought forward loss ₹37,000) = ₹3,000; Cycling business = ₹1,50,000; Warehousing facility loss = (₹1,00,000); PR Associates partnership loss share = (₹23,000); Subtotal = ₹30,000. Unabsorbed depreciation of ₹15,000 is set off against business income per Section 72A, resulting in net business income of ₹15,000.

Income from Other Sources:
Crossword puzzle solving = ₹30,000. Dividend income (gross) = ₹15,000; per Section 57, expenditure of ₹2,500 incurred in collecting dividend cannot be deducted as a special provision applies to dividend income. Total other sources = ₹45,000.

Treatment of Brought Forward Losses:
BF loss from house property (₹1,00,000) cannot be set off per Section 71 except against house property income; no such income is available. BF loss from gambling (₹10,000) is non-deductible per Section 72(2). Speculation loss (₹20,000) can only be set off against speculation income per Section 73; no such income exists. These are carried forward.

Agricultural Income:
Income from agricultural land in Haryana (₹25,000) is exempt under Section 10(1) and excluded from GTI.

Wife's Salary Note:
Mrs. Jai's salary of ₹1,20,000 from the firm is her individual income; it does not form part of Mr. Jai's GTI. The loss share of ₹23,000 provided represents Mr. Jai's allocable share after all firm-level calculations.

Answer: ₹2,15,000

To determine the deduction under Section 80G, first identify eligible donations and calculate the adjusted gross income (AGI).

Step 1: Calculate Gross Total Income (GTI)
GTI = Income from profession + Lottery winning = ₹11,70,000 + ₹70,000 = ₹12,40,000

Step 2: Identify Items Outside Section 80G Scope
Contribution to ULIP 1971 plan (₹70,000) falls under Section 80C (life insurance/investment deduction), not Section 80G. This is excluded from Section 80G but deductible separately under 80C.

Step 3: Calculate Adjusted Gross Income for Section 80G
AGI = GTI − Section 80C deduction = ₹12,40,000 − ₹70,000 = ₹11,70,000

Step 4: Identify and Classify Donations Eligible Under Section 80G

(a) Cheque donation to National Defence Fund: ₹60,000 → 100% relief (listed in Section 80G(2)(vi))

(b) Cheque donation to Government for promoting family planning: ₹35,000 → 100% relief (listed in Section 80G(2) with specific relief)

(c) Cheque donation to approved public charitable institute: ₹1,20,000 → Subject to 50% of AGI limitation (per Section 80G(5) for donations to charitable institutions via cheque/digital mode)

Step 5: Calculate Permissible Deduction for Charitable Institute Donation
Deduction = Lesser of:
- Actual donation: ₹1,20,000, OR
- 50% of AGI: 50% × ₹11,70,000 = ₹5,85,000

Permissible deduction = ₹1,20,000 (lower amount)

Step 6: Total Section 80G Deduction
Total = ₹60,000 + ₹35,000 + ₹1,20,000 = ₹2,15,000

PART 1: TCS ON OVERSEAS REMITTANCE

Provisions of Tax Collection at Source (TCS) under Section 194O of the Income Tax Act, 1961 apply to remittances made outside India by authorized dealers (banks). Authorized dealers are required to collect tax at source when a resident remits money outside India, ensuring documentation and compliance of outward remittances.

Rate of TCS: 5% of the remittance amount

Threshold for TCS Collection: TCS is collected on remittances exceeding ₹7 lakhs in a financial year per remitter. The first ₹7 lakhs per financial year is fully exempt.

Amounts on which NO TCS is Collected: (1) First ₹7 lakhs per financial year is exempt; (2) Remittances for purposes covered under the Liberalized Remittance Scheme (LRS), subject to prescribed limits; (3) Remittances for education abroad, medical treatment outside India, scholarships, gifts to relatives, and donations to specified charitable institutions; (4) Remittances in other categories exempted by the Board through notifications; (5) Business-related remittances where covered by applicable policies.

Procedure: Authorized dealers collect TCS at the time of remittance, deposit it with the government, and issue TCS certificates to remitters for claiming credit.

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PART 2: TAX RETURN PREPARER SCHEME, 2006

(i) Eligible Persons: Persons eligible to act as tax return preparer include: (1) Chartered Accountants holding valid membership from the Institute of Chartered Accountants of India (ICAI); (2) Cost Accountants with valid membership from the Institute of Cost Accountants of India; (3) Company Secretaries holding valid membership from the Institute of Company Secretaries of India (ICSI); (4) Indian citizens possessing Bachelor's degree from a recognized university and passing the examination prescribed by the Income-tax Board; (5) Other persons satisfying the eligibility criteria and qualifications specified by the Board.

(ii) Educational Qualifications of Tax Return Preparer: Requirements vary by category: Chartered Accountants must hold valid CA membership from ICAI. Cost Accountants must hold valid membership from the Institute of Cost Accountants of India. Company Secretaries must hold valid membership from ICSI. Other individuals must possess: (a) Bachelor's degree from a recognized university or equivalent qualification; AND (b) Passing of prescribed examination prescribed by the Income-tax Board, such as examinations on taxation or equivalent professional qualifications recognized by the Board.

(iii) Persons NOT Entitled to Act as Return Preparer: The following are disqualified: (1) Non-Indian citizens – Scheme is restricted to Indian citizens only; (2) Convicted persons – Those convicted of any offence involving moral turpitude, fraud, tax evasion, or dishonesty; (3) Suspended/Cancelled members – Persons whose membership or certificate has been suspended, cancelled, or terminated by their professional regulatory body; (4) Persons under disciplinary action – Those against whom disciplinary action has been taken by their professional body or who are under disciplinary proceedings; (5) Disqualified persons – Those declared insolvent, adjudged bankrupt, or disqualified under any law; (6) Non-compliant persons – Those who fail or refuse to comply with conditions prescribed by the Scheme or the Board; (7) Persons with adverse history – Those convicted under the Prevention of Money Laundering Act or similar statutes relating to financial crimes.

Computation of Net Minimum GST Payable in Cash by M/s. Honest Enterprise for December 2022

Treatment of Outward Supplies:

(i) Intra-state supply of goods to M/s. Natural & Sons — ₹7,00,000: Taxable at CGST 2.5% + SGST 2.5%. CGST = ₹17,500; SGST = ₹17,500.

(ii) Intra-state transfer to branch office (same GSTIN) — ₹1,00,000: Since both the principal place and the branch operate under the same GSTIN, they are NOT treated as distinct persons under Section 25 of the CGST Act 2017. Therefore, this transfer does NOT constitute a supply under Schedule I and no GST is payable.

(iii) Inter-state sponsorship services to XYZ Ltd, Chennai — ₹80,000: Under Notification No. 13/2017-CT(Rate) read with Section 9(3) of the CGST Act 2017 / Section 5(3) of the IGST Act 2017, where sponsorship services are provided to a body corporate or partnership firm, the recipient is liable to pay GST under Reverse Charge Mechanism (RCM). Since XYZ Ltd (a body corporate) is the recipient, GST liability falls on XYZ Ltd. Miss Nitya is not liable to pay GST on this supply.

(iv) Advance for management consultancy service from Mr. Sharad — ₹40,000: GST is payable on advances received for services as per Section 13 of the CGST Act 2017 (time of supply rules for services). Intra-state service: CGST @ 9% = ₹3,600; SGST @ 9% = ₹3,600.

Treatment of Inward Supplies (ITC):

(i) Purchase of taxable goods from registered suppliers — ₹8,00,000: ITC available — CGST ₹20,000; SGST ₹20,000.

(ii) Works Contract Service for repair of office building — ₹30,000: Under Section 17(5)(c) of the CGST Act 2017, ITC is blocked on works contract services for construction of immovable property. The Explanation to Section 17(5) defines 'construction' to include repairs only to the extent of capitalization. Since the repair amount is debited to Profit & Loss Account (i.e., not capitalized), the restriction does NOT apply. ITC is available — CGST ₹2,700; SGST ₹2,700.

(iii) Legal service from advocate — ₹50,000: Under Notification No. 13/2017-CT(Rate) read with Section 9(3) of the CGST Act 2017, GST on legal services from an individual advocate is payable by the recipient under RCM. Miss Nitya must pay: CGST @ 9% = ₹4,500; SGST @ 9% = ₹4,500 in cash (RCM cannot be paid using ITC as per Section 49(4) of the CGST Act 2017). However, ITC of the same amount (CGST ₹4,500; SGST ₹4,500) is available to Nitya to offset forward charge liability in the same period.

Key Rule — RCM Payment in Cash: As per Section 49(4) of the CGST Act 2017, tax payable under reverse charge (Section 9(3)) must be paid in cash and cannot be discharged using the ITC balance in the electronic credit ledger.

Net GST Computation: Total forward charge output tax: CGST ₹21,100 + SGST ₹21,100. Total ITC: CGST ₹27,200 + SGST ₹27,200. Since ITC (₹27,200) exceeds forward charge output tax (₹21,100) for both CGST and SGST, no cash is required for forward charge. Excess ITC of CGST ₹6,100 and SGST ₹6,100 is carried forward.

Minimum GST payable in cash = CGST ₹4,500 + SGST ₹4,500 = ₹9,000 (on account of RCM on legal services).

Journal Entries in Integrated (Integral) Cost and Financial Accounting System

In an integrated accounting system, cost accounts and financial accounts are maintained in a single set of books. There is no need for separate Cost Ledger Control Account or Financial Ledger Control Account. The entries flow directly through control accounts.

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(i) Purchase of Raw Material — ₹4,40,000

| Particulars | Dr. (₹) | Cr. (₹) |
|---|---|---|
| Raw Material Control A/c &emsp;&emsp;&emsp;&emsp; Dr. | 4,40,000 | |
| &emsp;To Creditors A/c | | 4,40,000 |

*(Being raw material purchased on credit)*

The Raw Material Control A/c (also called Stores Ledger Control A/c) is debited as inventory is received. In an integrated system, the creditor is credited directly in the same books without any intermediary control account.

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(ii) Direct Material Issued to Production — ₹3,60,000

| Particulars | Dr. (₹) | Cr. (₹) |
|---|---|---|
| Work-in-Progress Control A/c &emsp;&emsp; Dr. | 3,60,000 | |
| &emsp;To Raw Material Control A/c | | 3,60,000 |

*(Being direct material issued to production as per material requisition notes)*

When materials are issued to the factory floor for production, Work-in-Progress Control A/c is debited to accumulate production costs, and Raw Material Control A/c is credited to reduce inventory.

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(iii) Wages Charged to Production — ₹80,000

| Particulars | Dr. (₹) | Cr. (₹) |
|---|---|---|
| Work-in-Progress Control A/c &emsp;&emsp; Dr. | 80,000 | |
| &emsp;To Wages Control A/c | | 80,000 |

*(Being direct wages charged to production)*

Wages Control A/c accumulates all labour costs. When wages are allocated to production, Work-in-Progress Control A/c is debited. In practice, wages are first debited to Wages Control A/c (from Cash/Bank), and subsequently absorbed into WIP through this entry.

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(iv) Manufacturing Overheads Charged to Production — ₹1,32,000

| Particulars | Dr. (₹) | Cr. (₹) |
|---|---|---|
| Work-in-Progress Control A/c &emsp;&emsp; Dr. | 1,32,000 | |
| &emsp;To Manufacturing Overhead Control A/c | | 1,32,000 |

*(Being manufacturing overheads absorbed into production)*

Manufacturing Overhead Control A/c collects all factory overheads (actual). When overheads are charged/absorbed to production (usually at a predetermined absorption rate), Work-in-Progress Control A/c is debited. Any difference between actual overheads incurred and overheads absorbed results in over/under absorption, which is transferred to Costing Profit & Loss A/c at the period end.

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Summary — Total Costs Accumulated in WIP Control A/c:

Direct Material: ₹3,60,000 + Direct Wages: ₹80,000 + Manufacturing Overheads: ₹1,32,000 = ₹5,72,000 (Total cost charged to Work-in-Progress)

Standard Costing — Factory Overhead Variances for PQR Alloys Ltd.

Preliminary Calculations (Standard Rates & Actual Hours):

Variable OH rate per machine hour = ₹16 ÷ 0.80 hrs = ₹20 per machine hour

Fixed OH rate per unit = ₹6,72,000 ÷ 84,000 units = ₹8 per unit

Fixed OH rate per machine hour = ₹8 ÷ 0.80 hrs = ₹10 per machine hour

Budgeted machine hours = 84,000 × 0.80 = 67,200 hours

Standard hours for actual output = 87,600 × 0.80 = 70,080 hours

Deriving Actual Machine Hours using the Variable OH Efficiency Variance formula:
Variable OH Efficiency Variance = (Standard hours for actual output − Actual hours) × Standard rate per hour
−₹67,200 = (70,080 − Actual hours) × ₹20
Actual hours = 70,080 + 3,360 = 73,440 hours

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(i) Variable Factory Overhead Expenditure Variance:
This variance measures the difference between what the actual hours worked should have cost and what they actually cost.
= (Actual hours × Standard variable OH rate) − Actual variable OH
= (73,440 × ₹20) − ₹14,37,000
= ₹14,68,800 − ₹14,37,000
= ₹31,800 (Favourable)

(ii) Fixed Factory Overhead Expenditure Variance:
This is the difference between budgeted and actual fixed overheads.
= Budgeted Fixed OH − Actual Fixed OH
= ₹6,72,000 − ₹7,03,000
= ₹31,000 (Adverse)

(iii) Fixed Factory Overhead Efficiency Variance:
This variance arises due to the difference between standard hours for actual output and actual hours worked.
= (Standard hours for actual output − Actual hours) × Fixed OH rate per hour
= (70,080 − 73,440) × ₹10
= (−3,360) × ₹10
= ₹33,600 (Adverse)

(iv) Fixed Factory Overhead Capacity Variance:
This variance arises due to working more or fewer hours than budgeted.
= (Actual hours − Budgeted hours) × Fixed OH rate per hour
= (73,440 − 67,200) × ₹10
= 6,240 × ₹10
= ₹62,400 (Favourable)

Verification — Fixed OH Volume Variance:
Efficiency + Capacity = ₹33,600 (A) + ₹62,400 (F) = ₹28,800 (F)
Independent check: (87,600 − 84,000) × ₹8 = 3,600 × ₹8 = ₹28,800 (F) ✓

Step 1: Determine Total Production Units
Good units produced = 12,600, which represents 90% of total production (since 10% is scrap). Therefore, Total production = 12,600 ÷ 0.9 = 14,000 units. Scrap units = 14,000 × 10% = 1,400 units.

Step 2: Calculate Manufacturing Cost
Material cost: 14,000 units × 2 kg × ₹72/kg = ₹20,16,000
Direct wages: ₹8,82,000 (given)
Factory overheads: 80% of direct wages = 0.80 × ₹8,82,000 = ₹7,05,600
Less: Scrap recovery value: 1,400 units × ₹45/unit = ₹63,000
Total manufacturing cost = ₹20,16,000 + ₹8,82,000 + ₹7,05,600 − ₹63,000 = ₹35,40,600

Step 3: Calculate Cost Per Good Unit
Cost per good unit = ₹35,40,600 ÷ 12,600 = ₹281 per unit

Step 4: Calculate Cost of Goods Sold (COGS)
Cost of goods sold = 11,800 units sold × ₹281 = ₹33,15,800

Step 5: Calculate Total Cost of Sales
Distribution overheads = 11,800 units × ₹54/unit = ₹6,37,200
Total cost of sales = COGS + Distribution overheads = ₹33,15,800 + ₹6,37,200 = ₹39,53,000

Step 6: Calculate Profit
Sales revenue = 11,800 units × ₹416/unit = ₹49,08,800
Profit = Sales − Total cost of sales − Administrative overheads
Profit = ₹49,08,800 − ₹39,53,000 − ₹4,72,000 = ₹4,83,800

Final Answers:
Total cost of sales = ₹39,53,000
Profit = ₹4,83,800

Part (a): Cost Accounting Terms

(i) Pre-determined Cost is a cost calculated in advance of actual production based on technical estimates, engineering data, and prior experience. It serves as a benchmark for comparing actual costs and controlling production efficiency.

(ii) Estimated Cost is an anticipated cost prepared before actual incurrence, based on available information such as past data, current market conditions, and expected operational factors. It differs from predetermined cost in being less scientific and based more on judgment.

(iii) Imputed Cost refers to notional costs that are not actually incurred but are considered for decision-making and internal reporting purposes. Examples include interest on owner's capital, rent on own property, and salary of owner. These do not involve cash outflow but reflect economic sacrifice.

(iv) Discretionary Cost comprises costs incurred due to specific managerial decisions that can be altered or eliminated without immediately impairing operational efficiency in the short term. Examples include advertising, staff training, research and development, and public relations expenses.

Part (b): True/False Statements with Reasons

(i) FALSE. Under LIFO method during falling prices, the latest (lower-priced) materials are issued first, resulting in lower Cost of Goods Sold, higher profit, and consequently higher income-tax liability, not lower.

(ii) FALSE. VED analysis classifies inventories based on the criticality or vitality of items for production (Vital, Essential, Desirable), not on their cost. ABC analysis is the method that classifies based on cost of items.

(iii) FALSE. The Material Requisition Note is prepared by the production department or the department requiring materials, not by the storekeeper. The storekeeper acts upon it and issues materials accordingly.

(iv) FALSE. Simple Average Pricing is suitable when quantities are uniform across lots. When quantities are different and prices fluctuate considerably, Weighted Average Method is more appropriate as it reflects different quantities. Also, FIFO or Moving Weighted Average may be preferable during price fluctuations.

(v) FALSE. Bin Cards (for physical stock) and Stores Ledger (for monetary stock) are maintained by the Storekeeper or Stores Department, not the Purchasing Department. The Purchasing Department maintains purchase orders and supplier records.

Part (c): Employee Productivity

Employee Productivity is the output or value generated per unit of input, primarily labor hours. It measures how efficiently an employee performs assigned tasks.

Factors for Increasing Employee Productivity:
• Improved working conditions and ergonomic workplace environment
• Comprehensive training and skills development programs
• Competitive compensation and performance-based incentives
• Clear job objectives and performance standards
• Career advancement and growth opportunities
• Health, safety, and welfare provisions
• Modern tools, technology, and equipment
• Effective supervision and performance feedback
• Adequate work breaks and work-life balance
• Recognition and appreciation of achievements
• Employee involvement in decision-making
• Reduction in absenteeism through wellness programs

Part (d): Cost Accounting Terms

(i) Retention Money (or Retention Sum) is the amount withheld by the client from payments due to a contractor or supplier as security or guarantee for satisfactory completion of contractual obligations. It is held for a specified period and released only after verification of quality and performance.

(ii) Escalation Clause is a provision in a contract permitting adjustment of contract price based on specified conditions, such as changes in raw material prices, labor costs, inflation indices, or foreign exchange rates. It protects both parties from unpredictable cost fluctuations during the contract period.

(iii) Co-Products are two or more products of equal or comparable value produced simultaneously from the same raw material or common production process. Unlike by-products, co-products are all principal products, each having significant market value.

(iv) Job Costing is a method of ascertaining costs wherein costs are accumulated for each specific job, contract, or project treated as a separate cost unit. It is used in construction, printing, repairs, and other industries where work is done on specific orders.

(v) Process Costing is a costing method where costs are accumulated for each process or stage of production. It is used in continuous manufacturing where identical units pass through sequential processes, such as in textile, chemical, and petroleum refining industries.

Part (e): Cost Drivers and Categories

Cost Driver is any factor that causes or influences changes in the cost of an activity or product. It is the basis for assigning activity costs to cost objects in Activity-Based Costing (ABC).

Six Categories of Cost Drivers:
1. Unit-level drivers – relate to each unit produced (e.g., machine hours, direct labor hours)
2. Batch-level drivers – relate to groups of units (e.g., number of setups, number of production batches)
3. Product-sustaining drivers – relate to specific products (e.g., number of product lines, engineering changes)
4. Customer-sustaining drivers – relate to customers (e.g., number of customers, customer accounts)
5. Transaction-based drivers – relate to business transactions (e.g., number of orders, number of invoices)
6. Facility-sustaining drivers – relate to overall facility (e.g., building area, machine capacity)

Suitable Cost Drivers for Business Functions:

(i) Distribution: Number of deliveries; Weight/volume of goods distributed; Number of customers served; Distance traveled; Number of orders processed

(ii) Research and Development: Number of research projects; Development labor hours; Number of product lines; Patent filings; Machine hours for testing and research

(iii) Customer Services: Number of customer calls or inquiries; Number of service visits; Number of warranty claims; Customer complaint frequency; Service hours provided; Number of different customer issues handled

Answer: Value of taxable supply = ₹5,25,000

Item (I) – Security and Housekeeping Services (₹60,000):
Services of security and housekeeping provided to an educational institution are support/ancillary services, not teaching, training, or educational materials. Under Schedule III, Notification 12/2017-Central Tax (Rate), the exemption extends only to supplies by way of teaching or training and supply of educational materials to an educational institution. The location (outside premises on annual day) does not alter the character of the service. Status: TAXABLE at ₹60,000

Item (II) – Honorarium as Guest Anchor (₹2,25,000):
Participation as a guest anchor on television is an entertainment service supplied in relation to media/broadcasting. This falls under taxable service supply with no exemption applicable. Status: TAXABLE at ₹2,25,000

Item (III) – Contract Carriage for Employee Transportation (₹1,50,000):
Hiring of non-air conditioned contract carriage (motor vehicle) for employee transportation is a goods transport/logistics service. This is a taxable supply under the CGST Act, 2017. The exemption for passenger transport applies only under specific conditions not met here (inter-state passenger transport in certain categories). Status: TAXABLE at ₹1,50,000

Item (IV) – Training in Recreation Activities (Music) (₹90,000):
Provision of training in music as a recreational activity by an individual service provider does not qualify for exemption. The exemption notification (Schedule III, Notification 12/2017) exempts teaching/training only when supplied by an educational institution or to an educational institution for educational purposes. Training in recreational music by an individual is a taxable general service. Status: TAXABLE at ₹90,000

Item (V) – Residential Flat Rental (₹30,000):
Supply of service by way of renting of residential property is explicitly exempt under Schedule III, Notification 12/2017-Central Tax (Rate). The fact that the tenant is a registered person using it for personal residence (not business use) does not affect the exemption status of residential property rental. Status: EXEMPT at ₹0

Total Value of Supply on which GST is Payable: ₹60,000 + ₹2,25,000 + ₹1,50,000 + ₹90,000 = ₹5,25,000

Cost Sheet for the Year Ended 31st March 2023

Note on Raw Materials: The stock figure of ₹32,60,000 for raw materials is treated as raw materials consumed during the year (opening stock assumed nil, with no separate purchases figure given). WIP and Finished Goods figures are treated as closing stocks, with opening stocks at nil.

Classification Notes:
- Insurance on material procured (₹15,000) → part of direct material cost (landed cost of RM)
- Cost of special drawings (₹3,60,000) → direct expense (job-specific, charged directly)
- Rent of Factory Building (₹7,00,000) → split: 81% factory overhead (₹5,67,000), 19% admin overhead (₹1,33,000)
- Quality Control cost and Primary packing cost → factory overheads (integral to production/manufacturing process)
- Defective product rectification (₹33,600) → factory overhead (additional manufacturing cost)
- Scrap realization (₹1,20,600) → deducted from factory overheads
- Trade Discount, Marketing Staff Salary, Depreciation on Delivery Vans, Packing for transportation → Selling & Distribution overheads

| Particulars | ₹ | ₹ |
|---|---|---|
| A. DIRECT / PRIME COST | | |
| Raw Materials Consumed | 32,60,000 | |
| Add: Insurance on material procured | 15,000 | |
| Total Direct Material | | 32,75,000 |
| Direct Wages | | 42,00,000 |
| Direct Expenses — Cost of Special Drawings | | 3,60,000 |
| (i) PRIME COST | | 78,35,000 |
| | | |
| B. FACTORY / WORKS OVERHEADS | | |
| Power & Fuel | 18,75,000 | |
| Rent of Factory Building (81% × ₹7,00,000) | 5,67,000 | |
| Depreciation on Machinery | 6,25,000 | |
| Consumable Stores & Indirect Wages | 15,20,000 | |
| Quality Control Cost | 9,00,000 | |
| Primary Packing Cost | 12,00,000 | |
| Rectification of Defective Products | 33,600 | |
| Less: Scrap & Waste Realization | (1,20,600) | |
| Total Factory Overheads | | 66,00,000 |
| (ii) FACTORY COST (Prime Cost + Factory OH) | | 1,44,35,000 |
| Add: Opening Work-in-Progress | | Nil |
| Less: Closing Work-in-Progress | | (11,80,000) |
| Works Cost after WIP Adjustment | | 1,32,55,000 |
| | | |
| C. ADMINISTRATION OVERHEADS | | |
| Office Rent (19% × ₹7,00,000) | 1,33,000 | |
| General / Administrative Overheads | 17,50,000 | |
| Total Admin Overheads | | 18,83,000 |
| (iii) COST OF PRODUCTION | | 1,51,38,000 |
| Add: Opening Finished Goods | | Nil |
| Less: Closing Finished Goods | | (28,38,000) |
| (iv) COST OF GOODS SOLD | | 1,23,00,000 |
| | | |
| D. SELLING & DISTRIBUTION OVERHEADS | | |
| Trade Discount | 4,50,000 | |
| Depreciation on Delivery Vans | 1,20,000 | |
| Salary paid to Marketing Staff | 9,60,000 | |
| Packing Cost for Transportation | 1,84,000 | |
| Total Selling & Distribution Overheads | | 17,14,000 |
| (v) COST OF SALES | | 1,40,14,000 |

Summary: (i) Prime Cost = ₹78,35,000 | (ii) Factory Cost = ₹1,44,35,000 | (iii) Cost of Production = ₹1,51,38,000 | (iv) Cost of Goods Sold = ₹1,23,00,000 | (v) Cost of Sales = ₹1,40,14,000

Scenario (i): Mr. Sonu's Water Cooler Purchase and Donation

Answer: YES, this constitutes a supply under GST law.

Under Section 2(47) of the CGST Act, 2017, supply means provision of goods or services in any form, for consideration, by a person in the course or furtherance of business. The transaction between Malhotra Bros. (seller) and Mr. Sonu (buyer) is a clear supply because: (1) Goods (water cooler) are provided for consideration of ₹25,000; (2) The transaction is in the course of business by Malhotra Bros.; and (3) The essential element of consideration is satisfied. The fact that Mr. Sonu subsequently donates the water cooler to a temple does not negate the supply transaction that has already occurred between the buyer and seller. Additionally, the engraving service provided by Malhotra Bros. on the water cooler constitutes a separate supply of services. However, the donation of the water cooler to the temple by Mr. Sonu is not a supply because it involves transfer of goods without any consideration—it is a charitable gift and lacks the essential element of consideration required under Section 2(47). The supply liability arises for Malhotra Bros. at the point of sale to Mr. Sonu, not at the donation stage.

Scenario (ii): Wesco Ltd Receiving Free Management Consultancy Services

Answer: NO, this does not constitute a supply under GST law (basic definition), though GST implications may arise through reverse charge provisions.

Under Section 2(47) of CGST Act and Section 7 of CGST Act, the definition of supply mandates "for consideration" as an essential and non-negotiable element. Services provided free of cost without any consideration do not satisfy this fundamental requirement and therefore do not qualify as a supply under the basic definition. In this case, Wesco Ltd receives management consultancy services from its Singapore head office at no cost, meaning there is an absence of consideration. Important caveat: Although these free services are not technically a supply under Section 2(47), they may still have GST implications because: (1) Services imported from a person located outside India may be subject to reverse charge mechanism under Section 143 of CGST Act; (2) The value for GST purposes might be determined on an arm's length basis even though no actual payment is made; and (3) Since services are provided for business purposes (management consultancy for the Indian subsidiary), the transaction involves supply of services for business use. Therefore, while not a supply in the strict definitional sense, such services would typically be subject to IGST under the reverse charge provisions.

Answer: No, M/s. Bob & Sons is NOT allowed to generate the E-way bill.

Reasoning:

Requirement for E-way Bill Generation: According to the E-way Bill Rules, 2017, an e-way bill can be generated only when the recipient is a valid registered person under the CGST Act, 2017. The transaction value of ₹5,50,000 exceeds the ₹50,000 threshold for intra-state transactions, making an e-way bill mandatory for the movement.

Non-compliance by M/s. Lalit Kirana Stores: M/s. Lalit Kirana Stores, registered as a composition dealer, is statutorily required to furnish the statement for payment of self-assessment tax in Form GST CMP-08 within the prescribed period for each quarter. The non-filing for two consecutive quarters constitutes a serious breach of statutory obligations under the CGST Act, 2017.

Suspension of Registration: Under Section 29(5) of the CGST Act, 2017, the GST Officer is empowered to suspend the registration of any registered person who fails to furnish any required return, statement, or information within the prescribed period, after providing notice and an opportunity to be heard. Non-filing of GST CMP-08 for two consecutive quarters is a clear ground for invoking suspension proceedings against M/s. Lalit Kirana Stores' registration.

Impact on E-way Bill Validity: The E-way Bill system is designed to operate only between valid, active registered persons. Once a registration is suspended under Section 29(5), the person loses the status of a valid registered dealer. The e-way bill system will reject any attempt to generate an e-way bill for movement of goods to a person with suspended or cancelled registration.

Conclusion: Therefore, M/s. Bob & Sons cannot generate the E-way bill because M/s. Lalit Kirana Stores does not maintain valid, compliant registration status due to its non-filing of mandatory GST CMP-08 statements. The recipient's non-compliance makes it impossible for the supplier to legally and technically generate the required e-way bill.

Part (i): E-invoice Requirement for B2B Supply to Nightmare Ltd

E-invoice is MANDATORY for this transaction. Under Rule 48 of the CGST Rules 2017, e-invoice is required for all B2B supplies (supplies to registered taxable persons) made by persons whose aggregate turnover exceeds ₹1 crore. Dream World's annual aggregate turnover for FY 2022-23 is ₹12 crore, which significantly exceeds the ₹1 crore threshold. The transaction involves a supply of ₹12 lakh to Nightmare Ltd, a registered taxable person, constituting a B2B supply. Both conditions are satisfied: (a) the supplier's turnover exceeds ₹1 crore, and (b) the supply is B2B. Therefore, issuance of e-invoice is mandatory under Rule 48 of CGST Rules 2017.

Part (ii): Supply to SEZ Unit

If Nightmare Ltd is a Special Economic Zone (SEZ) unit, the position changes significantly. Supplies to SEZ units are treated as zero-rated supplies under Section 16 of the CGST Act 2017 (supplies of goods or services outside India). SEZ units are deemed to be located outside Indian territory for GST purposes. Supplies to SEZ units, being export supplies, are treated as supplies outside India and attract zero GST rate. For such zero-rated/export supplies, e-invoice is NOT mandatory. The e-invoice requirement under Rule 48 applies to B2B domestic supplies subject to the turnover threshold. Since supplies to SEZ units are treated as supplies outside India and are zero-rated, they fall outside the purview of the mandatory e-invoice requirement. Therefore, e-invoice is NOT MANDATORY for supplies to SEZ units, though an invoice must still be issued under the standard GST invoicing rules to document the zero-rated nature of the supply.

Yes, Mr. Atul is allowed to use the balance lying in the electronic credit ledger towards payment of the tax liability arising from the legal proceeding, subject to certain conditions under the GST law.

Provisions Governing Electronic Credit Ledger:

Under Rule 49 of the CGST Rules, 2017, every registered person is required to maintain an electronic credit ledger. Rule 49(3) and Rule 49(4) provide that the credit balance can be utilized for payment of any tax liability (CGST, SGST, IGST, or CESS) that is due by the registered person.

Restrictions on Use of Credit:

However, Rule 49(5) of the CGST Rules, 2017 imposes specific restrictions. The electronic credit cannot be used for:

(a) Payment of Penalty — Any penalty levied under GST law cannot be discharged using ITC.

(b) Payment of Interest — Interest payable on any tax liability cannot be paid from the credit ledger.

(c) Where Credit is Not Admissible — If the credit itself is not admissible under Section 16 of the CGST Act, 2017, it cannot be used for payment of any liability.

(d) Tax Liability Prior to 1st July 2017 — Credit cannot be used for demands relating to the pre-GST regime.

Application to Mr. Atul's Situation:

Analyzing the conditions in Mr. Atul's case:

1. The liability is for tax only (IGST of ₹80,000). The question expressly states "other than RCM liability," confirming this is a direct tax liability arising from the proceeding, not a penalty or interest component.

2. The ITC balance of ₹1,20,000 is already credited to the electronic credit ledger, which conclusively establishes that it was originally admissible under Section 16 of the CGST Act, 2017.

3. The tax liability arises from a legal proceeding under GST law for the current period (November 2022). The fact that Mr. Atul agrees with the tax liability confirms it is a substantive demand, not a disputed claim.

Conclusion:

Mr. Atul can use the electronic credit lying in the credit ledger for payment of the tax liability of ₹80,000 arising from the legal proceeding, as the conditions prescribed under Rule 49(5) are not violated. The balance in his electronic credit ledger will reduce from ₹1,20,000 to ₹40,000 after payment, with the remaining balance available for future tax payments.

This question presents two alternative provisions; both are addressed below:

PART (1): REVERSAL OF ITC IN CASE OF NON-PAYMENT BY SUPPLIER AND RE-AVAILMENT

Principle of ITC Eligibility: Section 16(1) of the CGST Act, 2017 permits a registered person to take ITC on inward supplies of goods or services only when the supplier has paid the tax to the Government. ITC is a credit on tax actually paid, not claimed.

Reversal Requirement: When a supplier fails to pay the tax (due to insolvency, business closure, or default), the recipient must reverse the ITC previously claimed on those supplies. Rule 43 of CGST Rules, 2017 mandates this reversal in cases where:
- The supplier has not paid the tax to the Government within the prescribed time;
- The supplier's registration is cancelled;
- The supply is subsequently found to be fraudulent or irregular.

Procedure for Reversal: The recipient must (a) identify the affected inward supplies; (b) reverse the corresponding input credit in the returns; (c) pay back the reversed amount; (d) pay applicable interest on the reversed amount if not paid within the due date.

Re-Availment Provision: Once the supplier pays the unpaid tax to the Government, the recipient is permitted to re-avail the ITC on those supplies. The re-availment can be done in the subsequent tax period when proof of supplier's payment is received, provided the goods/services are used for taxable supplies and all eligibility conditions are met.

PART (2): REVOCATION OF SUO-MOTU CANCELLATION OF REGISTRATION

Suo-Motu Cancellation: Section 29 of the CGST Act, 2017 empowers the Proper Officer to cancel a person's registration without their application (suo-motu) on grounds such as: continuous default in filing returns; non-payment of tax; closure of business; violation of statutory provisions; or failure to comply with the conditions of registration.

Eligibility for Revocation: A person whose registration is cancelled suo-motu may apply for revocation of that cancellation within 5 years from the date of cancellation, subject to conditions.

Procedure for Revocation (Section 29(6)):
1. Application: The applicant files a formal application to the Proper Officer requesting revocation of cancellation, along with supporting documents demonstrating compliance with registration conditions.
2. Show Cause Notice: The Proper Officer issues a show cause notice specifying the reasons for the original cancellation and what conditions must be satisfied for revocation to be granted.
3. Reply and Hearing: The applicant submits a detailed reply with evidence demonstrating: (a) reasons for the original default no longer exist; (b) all outstanding tax and penalties have been paid; (c) all returns have been filed; (d) genuine business reason for revocation.
4. Adjudication: The Proper Officer considers the reply, may seek additional information, and grants revocation if satisfied that all conditions are met and no fraud or suppression of facts occurred.
5. Recovery of Tax: Even after revocation, any tax, interest, or penalties outstanding during the period of cancellation remain recoverable.
6. Conditions on Revoked Registration: The revoked registration may be subject to conditions such as enhanced scrutiny, monthly return filing, or security deposit if deemed necessary to ensure compliance.

Rule 88C of the CGST Rules 2017 provides a specific procedure when a registered person cannot file GSTR-1 because the tax payable as declared in GSTR-1 exceeds the tax payable as declared in GSTR-3B for the corresponding tax period. This provision ensures reconciliation between outward supply declarations and tax liabilities.

Understanding the Issue: In Mr. Sameer's case, the tax liability shown in GSTR-1 (based on outward supplies) is higher than the tax liability shown in GSTR-3B (containing amended figures, input tax credit adjustments, and other corrections). The GST system prevents filing of GSTR-1 in such situations to maintain integrity of tax records.

Procedure for Mr. Sameer (Registered Person):

1. File GSTR-3B First: Mr. Sameer must ensure that GSTR-3B for the relevant tax period has been filed. If not already filed, he must file it immediately with correct details, including any amendments, ITC adjustments, and tax payable calculations.

2. Calculate the Difference: After filing GSTR-3B, calculate the shortfall: Difference = Tax payable in GSTR-1 minus Tax payable in GSTR-3B. If GSTR-3B has already been filed and the difference still exists, this amount represents additional tax liability.

3. Pay the Difference Amount: Mr. Sameer must pay the difference amount through the appropriate tax payment mechanism (ITNS 04 or applicable payment gateway) before attempting to file GSTR-1. This payment should be made as tax liability for that period.

4. File GSTR-1: Only after the difference payment is successfully recorded in the system can GSTR-1 be filed. The system will validate the payment before allowing GSTR-1 filing.

Procedure for the Department:

1. System-Level Validation: The GST portal automatically checks, during GSTR-1 filing, whether tax payable in GSTR-1 exceeds tax payable in GSTR-3B. If this condition is detected, the system blocks GSTR-1 filing with an appropriate error message.

2. Communication with Taxpayer: The system notifies Mr. Sameer about the reconciliation issue and the amount requiring payment.

3. Payment Verification: Once payment of the difference is made, the system verifies the transaction and updates the taxpayer's account.

4. Enable GSTR-1 Filing: After successful payment verification, the system removes the block and allows GSTR-1 to be filed.

5. Reconciliation Review: The department monitors reconciliation through automated reports and can manually review cases if required.

Key Points: The difference amount paid becomes part of the tax liability for that period. This procedure ensures that total tax liability is consistent and prevents mismatches between outward supplies declaration and actual tax payable. The blocked filing is a protective measure and is automatically resolved upon compliance by the taxpayer.

NOTE: This question appears to be incomplete — specific overhead costs, employee numbers, and machine hours are not provided in the question text. The solution below shows the CA Intermediate examination framework and methodology for solving such problems.

Step Method of Service Department Allocation

The Step Method (Sequential Method) allocates service department costs to other departments in a predetermined order. Once a service department's costs are fully allocated, it receives no further allocations, distinguishing it from the Reciprocal Method.

Step 1: Allocation of Department R's Overheads
Department R's overhead costs are allocated to all other departments (Service Department S and both Production Departments) based on the number of employees. The allocation is calculated as:

Allocation Rate for Department R = Total Overhead of R ÷ Total Number of Employees (in S and production departments)

Each receiving department is charged: Number of Employees × Allocation Rate

Step 2: Allocation of Department S's Overheads
Department S's overhead costs (including any amount received from Department R in Step 1) are allocated only to the production departments based on machine hours. The allocation is calculated as:

Allocation Rate for Department S = (Original S Overhead + Amount Received from R) ÷ Total Machine Hours (in production departments only)

Note: Department R is not included in Step 2 as its costs are already fully distributed.

Each production department is charged: Machine Hours × Allocation Rate

Part (a): Statement of Distribution
The solution requires tabular presentation with columns for each department showing original overheads, allocation from R, allocation from S, and final overhead after reapportionment.

Part (b): Total Budgeted Overheads for Production Departments
Sum the allocated overheads from both service departments for each production department. The total of both production departments should equal the combined original overheads of all four departments.

Part (c): Overhead Absorption Rate
The most appropriate absorption base for each production department should be selected based on the nature of operations:
- If labor-intensive: Machine Hours ÷ Total Budgeted Overheads = Overhead per machine hour
- If equipment-intensive: Labor Hours ÷ Total Budgeted Overheads = Overhead per labor hour
- Alternative: Prime Cost or Production Quantity

Absorption Rate = Total Allocated Overhead ÷ Appropriate Base

Required Data for Numerical Solution: Original overheads of R and S, number of employees in each department, and machine hours for each department must be provided to complete the calculations.

Royal Hotel — Annual Profitability Statement by Room Type

Step 1 — Occupied Room Nights (Annual)

Deluxe: 20 rooms × 80% × 365 = 5,840 room nights
Executive: 10 rooms × 60% × 365 = 2,190 room nights
Suite: 4 rooms × 75% × 365 = 1,095 room nights
Total occupied room nights = 9,125

Step 2 — Revenue

Deluxe: 5,840 × ₹1,500 = ₹87,60,000
Executive: 2,190 × ₹2,400 = ₹52,56,000
Suite: 1,095 × ₹3,800 = ₹41,61,000

Step 3 — Housekeeping Expenses (variable, per room night occupied)

Deluxe: 5,840 × ₹280 = ₹16,35,200
Executive: 2,190 × ₹320 = ₹7,00,800
Suite: 1,095 × ₹435 = ₹4,76,325

Step 4 — Contractor Charges (double occupancy = 2 persons/room)

*Breakfast (Executive + Suite only):*
Executive: 2,190 × 2 × ₹150 = ₹6,57,000
Suite: 1,095 × 2 × ₹150 = ₹3,28,500

*Swimming Pool (Suite only):*
Suite: 1,095 × 2 × ₹200 = ₹4,38,000

Step 5 — Salary Apportionment (ratio 25:35:40)

Total Salaries = ₹57,60,000
Deluxe: ₹57,60,000 × 25/100 = ₹14,40,000
Executive: ₹57,60,000 × 35/100 = ₹20,16,000
Suite: ₹57,60,000 × 40/100 = ₹23,04,000

Step 6 — Electricity Apportionment (in proportion to occupied room nights)

Occupied nights ratio: 5,840 : 2,190 : 1,095 = 16 : 6 : 3 (dividing by 365)
Total parts = 25
Total Electricity = ₹24,00,000
Deluxe: ₹24,00,000 × 16/25 = ₹15,36,000
Executive: ₹24,00,000 × 6/25 = ₹5,76,000
Suite: ₹24,00,000 × 3/25 = ₹2,88,000

Step 7 — Annual Profit Statement

| Particulars | Deluxe (₹) | Executive (₹) | Suite (₹) |
|---|---|---|---|
| Revenue | 87,60,000 | 52,56,000 | 41,61,000 |
| Less: Housekeeping | 16,35,200 | 7,00,800 | 4,76,325 |
| Less: Breakfast | — | 6,57,000 | 3,28,500 |
| Less: Swimming Pool | — | — | 4,38,000 |
| Less: Salaries | 14,40,000 | 20,16,000 | 23,04,000 |
| Less: Electricity | 15,36,000 | 5,76,000 | 2,88,000 |
| Total Cost | 46,11,200 | 39,49,800 | 38,34,825 |
| Profit | 41,48,800 | 13,06,200 | 3,26,175 |

Total Annual Profit of Royal Hotel = ₹41,48,800 + ₹13,06,200 + ₹3,26,175 = ₹57,81,175

Part (a) — JH Plastics Limited: Traditional vs ABC Costing

NOTE: The question as presented omits critical data for Part (a) — specifically the production volumes for S, M, L and the activity driver quantities (number of purchase orders, setups, inspections) per product. The methodology and illustrative workings are presented below using assumed data consistent with standard ICAI study material versions of this question (S = 75,000 units, M = 25,000 units, L = 10,000 units; POs: S=30, M=25, L=15; Setups: S=40, M=30, L=20; Inspections: S=40, M=30, L=12). Students must substitute actual question data in the examination.

Total Overheads = ₹7,00,000 + ₹9,00,000 + ₹6,56,000 + ₹5,64,000 = ₹28,20,000

(a)(i)(a) — Traditional Costing Approach

Overhead Absorption Rate (OAR) based on machine hours:
Total machine hours = (75,000 × 0.30) + (25,000 × 0.40) + (10,000 × 0.50) = 22,500 + 10,000 + 5,000 = 37,500 hours
OAR = ₹28,20,000 ÷ 37,500 = ₹75.20 per machine hour

| Cost Element | S (₹) | M (₹) | L (₹) |
|---|---|---|---|
| Direct Material | 158.00 | 179.00 | 250.00 |
| Direct Labour | 40.00 | 45.00 | 60.00 |
| Overhead (OAR × MH) | 22.56 | 30.08 | 37.60 |
| Total Cost/unit | 220.56 | 254.08 | 347.60 |
| Selling Price (+25%) | 275.70 | 317.60 | 434.50 |

(a)(i)(b) — Activity-Based Costing (ABC) Approach

Activity cost driver rates:
- Purchasing: ₹7,00,000 ÷ 70 POs = ₹10,000 per PO
- Machine Setup: ₹9,00,000 ÷ 90 setups = ₹10,000 per setup
- Quality Control: ₹6,56,000 ÷ 82 inspections = ₹8,000 per inspection
- Machining: ₹5,64,000 ÷ 37,500 hrs = ₹15.04 per machine hour

ABC overhead per unit: S = ₹18.11, M = ₹37.62, L = ₹52.12 (see working notes)

| Cost Element | S (₹) | M (₹) | L (₹) |
|---|---|---|---|
| Direct Material | 158.00 | 179.00 | 250.00 |
| Direct Labour | 40.00 | 45.00 | 60.00 |
| ABC Overhead/unit | 18.11 | 37.62 | 52.12 |
| Total Cost/unit | 216.11 | 261.62 | 362.12 |
| Selling Price (+25%) | 270.14 | 327.03 | 452.65 |

(a)(ii) — Difference in Selling Price

| Product | ABC Price (₹) | Traditional Price (₹) | Difference (₹) | Status |
|---|---|---|---|---|
| S | 270.14 | 275.70 | −5.56 | Over-priced under traditional |
| M | 327.03 | 317.60 | +9.43 | Under-priced under traditional |
| L | 452.65 | 434.50 | +18.15 | Under-priced under traditional |

Interpretation: High-volume product S is over-priced under the traditional system because it absorbs disproportionate overhead relative to the activities it actually consumes. Low-volume products M and L are under-priced (cross-subsidised by S) because traditional costing fails to capture their higher per-unit activity consumption. ABC corrects this distortion by tracing costs to products based on actual activity usage.

---

Part (b) — R Ltd. Shut-down Decision Analysis

(i) Should the Noida Plant be Shut Down?

Contribution per unit = ₹15 − (80% × ₹15) = ₹15 − ₹12 = ₹3 per unit

Statement of Comparative Loss:

| Particulars | Continue (₹) | Shut Down (₹) |
|---|---|---|
| Contribution (60,000 × ₹3) | 1,80,000 | Nil |
| Less: Fixed Costs | (4,20,000) | — |
| Less: Unavoidable Fixed Costs | — | (2,00,000) |
| Less: Shutdown Costs | — | (25,000) |
| Net Loss | (2,40,000) | (2,25,000) |

Conclusion: The loss from shutting down (₹2,25,000) is less than the loss from continuing operations (₹2,40,000) by ₹15,000. Therefore, the Noida Plant should be shut down.

(ii) Shut-down Point (in units)

The shut-down point is the output level at which the firm is indifferent between continuing and shutting down, i.e., where loss from operations = loss from shutdown.

Loss if operating = Fixed Cost − Contribution = ₹4,20,000 − 3Q
Loss if shut down = Unavoidable FC + Shutdown Costs = ₹2,00,000 + ₹25,000 = ₹2,25,000

Setting equal:
4,20,000 − 3Q = 2,25,000
3Q = 1,95,000
Q = 65,000 units

The shut-down point is 65,000 units. Since current production (60,000 units) is below the shut-down point, the decision to shut down is validated.