CA Inter Cost & Mgmt — Question Paper — May 2023

Product Mix and Profit Maximization — MNP Company Limited

Step 1: Identify the Limiting Factor

The scarce resource is machine hours (55,000 hours available). To allocate machine hours optimally, we must calculate Contribution per Machine Hour for each product.

Step 2: Machine Hours per Unit

Variable factory overheads are charged at ₹4 per machine hour.

- Product A: ₹40 ÷ ₹4 = 10 machine hours per unit
- Product B: ₹20 ÷ ₹4 = 5 machine hours per unit

Step 3: Contribution per Unit

Contribution = Selling Price − Variable Cost (DM + DL + Variable OH)

- Product A: ₹180 − (₹55 + ₹35 + ₹40) = ₹180 − ₹130 = ₹50 per unit
- Product B: ₹175 − (₹60 + ₹45 + ₹20) = ₹175 − ₹125 = ₹50 per unit

Step 4: Contribution per Machine Hour (Key Ratio)

- Product A: ₹50 ÷ 10 hours = ₹5 per machine hour
- Product B: ₹50 ÷ 5 hours = ₹10 per machine hour

Ranking: Product B (Rank 1) → Product A (Rank 2)

Step 5: Optimal Product Mix

Allocate machine hours first to Product B (higher-ranked), then to Product A with remaining hours.

- Product B: 6,000 units × 5 hours = 30,000 hours used
- Remaining hours: 55,000 − 30,000 = 25,000 hours
- Product A: 25,000 ÷ 10 = 2,500 units

Optimal Mix: Product A — 2,500 units; Product B — 6,000 units

Step 6: Profit Calculation

Total Contribution = (2,500 × ₹50) + (6,000 × ₹50) = ₹1,25,000 + ₹3,00,000 = ₹4,25,000

Less: Fixed Expenses = ₹1,60,000

Maximum Profit = ₹2,65,000 per month

Note: The question as presented is incomplete — it references ₹1,35,000 as depreciation on 31st March but does not provide the underlying asset schedule (cost of assets, date of purchase, useful life, residual value, or depreciation method). The following answer provides the complete framework and illustrative solution a CA student must apply, using the given ₹1,35,000 figure as total depreciation for the year, consistent with AS 10 (Property, Plant and Equipment) and Schedule II of the Companies Act, 2013.

(a) Calculation of Depreciation on TSK Limited Assets

Applicable Standard: AS 10 — Property, Plant and Equipment (revised) governs recognition, measurement, and depreciation of fixed assets. Schedule II of the Companies Act, 2013 prescribes useful lives to be used unless the company can technically justify a different life with appropriate disclosure.

Depreciation must be calculated individually for each asset class. The Straight Line Method (SLM) or Written Down Value (WDV) method may be adopted consistently per AS 10, Para 62. The depreciable amount (Cost less Residual Value) is allocated over the useful life.

Formula — SLM: Annual Depreciation = (Cost − Residual Value) ÷ Useful Life (years)
Formula — WDV: Annual Depreciation = Opening WDV × Applicable Rate %

Assuming assets totalling ₹1,35,000 represent the gross depreciation charge for the year (as stated in the question), this amount is recognised as an expense in the Statement of Profit and Loss and deducted from the Gross Block in the Balance Sheet to arrive at Net Block.

Where an asset is acquired during the year, depreciation is charged pro-rata from the date the asset is ready for its intended use (AS 10, Para 55).

(b) Statement of Financial Position with Depreciation Adjustments

The Balance Sheet (Statement of Financial Position) under Schedule III of the Companies Act, 2013 presents fixed assets as follows:

Fixed Assets (Non-Current Assets):
Gross Block (at cost) → Less: Accumulated Depreciation → Net Block (Carrying Amount)

For TSK Limited, the depreciation of ₹1,35,000 for the current year is added to the opening accumulated depreciation to arrive at the closing accumulated depreciation figure. The Net Block reduces accordingly. This treatment is consistent with AS 10, Para 30, which requires assets to be carried at cost less accumulated depreciation and accumulated impairment losses.

Retained Earnings (Reserves and Surplus): The Statement of P&L charge of ₹1,35,000 reduces profit for the year, which in turn reduces the closing balance of Retained Earnings in the Balance Sheet.

(c) Accounting Treatment and Disclosures

Accounting Treatment:
As per AS 10, Para 46, depreciation of each period is recognised in the Statement of Profit and Loss unless it is included in the carrying amount of another asset. The journal entry is:

Dr. Depreciation Expense A/c — ₹1,35,000
Cr. Accumulated Depreciation A/c — ₹1,35,000

At year-end: Dr. Statement of P&L / P&L A/c → Cr. Depreciation Expense A/c

Change in Method: If TSK Limited changes its depreciation method (e.g., SLM to WDV), it constitutes a change in accounting estimate under AS 5 (Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies). The change is applied prospectively and disclosed.

Disclosures Required under AS 10 (Para 73–79):
1. Depreciation methods used for each class of PPE.
2. Useful lives or depreciation rates used.
3. Gross carrying amount and accumulated depreciation at beginning and end of period.
4. A reconciliation of the carrying amount (opening balance, additions, disposals, depreciation charge, closing balance — i.e., the Fixed Asset Schedule).
5. Restrictions on title, assets pledged as security, and capital commitments.
6. If a different useful life is adopted than Schedule II, justification must be disclosed in the Board's Report.

(d) Working Notes for Calculations

The working notes demonstrate the Fixed Asset Schedule and depreciation computation. Since specific asset-wise data is not provided in the question, the framework below must be applied to each asset class. The total depreciation ties back to ₹1,35,000 as given.

Final Answer: Depreciation charge for the year for TSK Limited = ₹1,35,000, recognised in the Statement of P&L and deducted from Gross Block to arrive at Net Block in the Balance Sheet. All disclosures as required under AS 10 and Schedule III of the Companies Act, 2013 must be made.

Note on Opening Stock: The question states opening stock cost as ₹6,210. Since only cost (not quantity) is given, the opening stock quantity is derived as 690 kg @ ₹9/kg (690 × 9 = ₹6,210). This ₹9/kg is the pre-January purchase price, consistent with the price pattern. This gives total purchases = 21,720 + 5,100 − 690 = 26,130 kg.

(i) Consumption of Raw Materials (month-wise)

Production (units) = Working days × Units per working day. Consumption = Production × 4 kg per unit.

| Month | Working Days | Units/Day | Production (units) | Consumption (kg) |
|-------|-------------|-----------|-------------------|------------------|
| January | 25 | 50 | 1,250 | 5,000 |
| February | 24 | 55 | 1,320 | 5,280 |
| March | 26 | 60 | 1,560 | 6,240 |
| April | 25 | 52 | 1,300 | 5,200 |
| Total | 100 | — | 5,430 | 21,720 |

(ii) Month-wise Quantity and Value of Raw Materials Purchased

Total purchases (kg) = Total consumption + Closing stock − Opening stock = 21,720 + 5,100 − 690 = 26,130 kg

Monthly purchases = Given % × 26,130 kg (rounded to integers, net sum = 26,130 kg):

| Month | % | Quantity (kg) | Rate (₹/kg) | Value (₹) |
|-------|---|--------------|-------------|----------|
| January | 21% | 5,487 | 10 | 54,870 |
| February | 26% | 6,794 | 12 | 81,528 |
| March | 30% | 7,839 | 13 | 1,01,907 |
| April | 23% | 6,010 | 11 | 66,110 |
| Total | 100% | 26,130 | — | 3,04,415 |

(iii) Priced Stores Ledger — FIFO Method

Under FIFO (First-In-First-Out), oldest stock is issued first.

JANUARY:
Opening: 690 kg @ ₹9 = ₹6,210 | Receipts: 5,487 kg @ ₹10 = ₹54,870
Issues (5,000 kg): 690 kg @ ₹9 = ₹6,210 + 4,310 kg @ ₹10 = ₹43,100 → ₹49,310
Closing Balance: 1,177 kg @ ₹10 = ₹11,770

FEBRUARY:
Opening: 1,177 kg @ ₹10 = ₹11,770 | Receipts: 6,794 kg @ ₹12 = ₹81,528
Issues (5,280 kg): 1,177 kg @ ₹10 = ₹11,770 + 4,103 kg @ ₹12 = ₹49,236 → ₹61,006
Closing Balance: 2,691 kg @ ₹12 = ₹32,292

MARCH:
Opening: 2,691 kg @ ₹12 = ₹32,292 | Receipts: 7,839 kg @ ₹13 = ₹1,01,907
Issues (6,240 kg): 2,691 kg @ ₹12 = ₹32,292 + 3,549 kg @ ₹13 = ₹46,137 → ₹78,429
Closing Balance: 4,290 kg @ ₹13 = ₹55,770

APRIL:
Opening: 4,290 kg @ ₹13 = ₹55,770 | Receipts: 6,010 kg @ ₹11 = ₹66,110
Issues (5,200 kg): 4,290 kg @ ₹13 = ₹55,770 + 910 kg @ ₹11 = ₹10,010 → ₹65,780
Closing Balance: 5,100 kg @ ₹11 = ₹56,100 ✓ (matches given closing stock)

Verification: Total Inflows (₹6,210 + ₹3,04,415) = ₹3,10,625. Total Outflows (₹2,54,525 issues + ₹56,100 closing) = ₹3,10,625. ✓

Determination of Residential Status of Mr. Jai Chand for AY 2023-24 (PY 2022-23)

Step 1: Check Basic Conditions under Section 6(1) of the Income Tax Act, 1961

An individual is Resident if he satisfies ANY ONE of the following:
- Condition 1: Present in India for 182 days or more during the PY 2022-23.
- Condition 2: Present in India for 60 days or more during PY 2022-23 AND 365 days or more during the 4 immediately preceding previous years.

Important Exception: As per the proviso to Section 6(1), where an Indian citizen leaves India for employment outside India, the threshold of 60 days in Condition 2 is substituted by 182 days.

Mr. Jai Chand is an Indian citizen who left India for employment in Country X. In PY 2022-23, he did not visit India at all (0 days).

- Condition 1: 0 days < 182 days → Not satisfied
- Condition 2 (as modified): 0 days < 182 days → Not satisfied

Conclusion: Mr. Jai Chand is NOT a Resident under the basic conditions of Section 6(1).

Step 2: Check Deemed Resident Provisions under Section 6(1A)

Introduced by the Finance Act, 2020 (applicable from AY 2021-22), Section 6(1A) provides that an Indian citizen shall be deemed to be resident in India if ALL of the following conditions are met:
1. He is an Indian citizen.
2. He is not liable to tax in any other country or territory by reason of his domicile, residence or any other criteria.
3. His total income (other than income from foreign sources) exceeds ₹15,00,000 during the previous year.

Checking each condition for Mr. Jai Chand:
- Indian citizen? Yes ✓
- Not liable to tax in Country X? Yes — Country X has no personal income-tax regime, so he bears no tax liability there ✓
- Total income (excluding foreign source income) > ₹15,00,000?
- Income from commercial building in Delhi (Indian source): ₹12,00,000
- Income from retail store in India (Indian source): ₹4,50,000
- Total = ₹16,50,000 > ₹15,00,000 ✓

All three conditions are satisfied. Therefore, Mr. Jai Chand is a Deemed Resident under Section 6(1A).

Step 3: Determine Ordinary or Not Ordinarily Resident Status

As per Section 6(6)(c), a person who is deemed resident under Section 6(1A) shall be treated as "Not Ordinarily Resident" in India.

Final Conclusion: Mr. Jai Chand is a Resident but Not Ordinarily Resident (RNOR) in India for Assessment Year 2023-24.

Part 1: Determination of Residential Status of Mr. Prasham for FY 2022-23 (AY 2023-24)

Under Section 6(1) of the Income Tax Act, 1961, an individual is a resident if he satisfies at least one of the two basic conditions:
- Condition 1: Present in India for 182 days or more during the previous year.
- Condition 2: Present in India for 60 days or more during the previous year AND 365 days or more during the 4 immediately preceding previous years.

Note: The extended threshold of 182 days (in place of 60 days) under the proviso applies only to Indian citizens or Persons of Indian Origin visiting India. Mr. Prasham is an Australian citizen (not a person of Indian origin as per the facts given), so the normal 60-day rule applies.

For FY 2022-23, Mr. Prasham was present in India for 200 days. Since 200 days ≥ 182 days, Condition 1 is satisfied. Mr. Prasham is a Resident.

Determining ROR or RNOR under Section 6(6):

A resident is Resident but Not Ordinarily Resident (RNOR) if:
- (a) He was a non-resident in 9 out of 10 previous years immediately preceding FY 2022-23, OR
- (b) He was present in India for 729 days or less during the 7 previous years immediately preceding FY 2022-23.

*Checking condition (a):* The 10 preceding years are FY 2012-13 to FY 2021-22. Mr. Prasham visited India for 125 days each year. For these years: Condition 1 (182 days) is not met. Condition 2: 125 days ≥ 60 days AND days in 4 preceding years = 125 × 4 = 500 days ≥ 365 days — satisfied (once his pattern was established for 4+ years). He was a resident in most of the preceding 10 years, not a non-resident in 9 out of 10. Condition (a) is NOT satisfied.

*Checking condition (b):* Total days in the 7 preceding years (FY 2015-16 to FY 2021-22) = 7 × 125 = 875 days > 729 days. Condition (b) is NOT satisfied.

Since neither condition is satisfied, Mr. Prasham is a Resident and Ordinarily Resident (ROR) for FY 2022-23 / AY 2023-24.

Implication: As ROR, Mr. Prasham's global income (income received, accruing, or arising anywhere in the world) is taxable in India under Section 5(1).

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Part 2: Computation of Total Income for AY 2023-24

Income from Business or Profession:

(i) *Income from business in Australia, controlled from Australia — ₹2,00,000:* As an ROR, all foreign income is taxable. Taxable in India: ₹2,00,000.

(ii) *Income from business in Sri Lanka, controlled from Chennai — ₹1,60,000:* The business is controlled and managed from Chennai, India. Under Section 9(1)(i), income from a business connection in India is deemed to accrue or arise in India. This income is taxable even for a non-resident. For ROR, it is clearly taxable: ₹1,60,000.

Capital Gains:

(iii) *Short-term capital gains on sale of shares of an Indian company — ₹50,000:* Though the shares were sold in Australia and proceeds received there, the shares of an Indian company constitute a capital asset situated in India. Under Section 9(1)(i), transfer of a capital asset situated in India is deemed to accrue or arise in India. Taxable: ₹50,000. (Since STT was not paid — sold outside India — Section 111A concessional rate of 15% does not apply; normal slab rates apply at tax computation stage.)

Income from Other Sources:

(iv) *Income from agricultural land in Australia — ₹2,00,000:* Agricultural income under Section 2(1A) covers only income from land situated in India. Income from agricultural land in Australia does not qualify as agricultural income and is NOT exempt under Section 10(1). The fact that it was later brought to India is irrelevant for an ROR (whose global income is taxable regardless of remittance). Taxable as income from other sources: ₹2,00,000.

Total Income of Mr. Prasham for AY 2023-24: ₹6,10,000

Note on Contract Value: The contract value is taken as ₹70,00,000 (as work certified cumulatively equals ₹70,00,000 by end of Year 2, indicating contract completion).

Step 1 – Escalation Receivable (Year 2 only)

The escalation clause compensates B Limited for increases in material rates and wage rates in Year 2 based on standard quantities/hours.

*Material Escalation:* Standard quantity Year 2 = 12,000 units. Rate increase = ₹120 – ₹105 = ₹15 per unit. Escalation = 12,000 × ₹15 = ₹1,80,000.

*Wage Escalation:* Standard rate is ₹120 per hour in both years — no change. Hence, wage escalation = Nil.

Total Escalation Receivable = ₹1,80,000

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Step 2 – Contract Account for Year 1

*Dr Side:* Materials ₹12,50,000 | Wages ₹12,50,000 | Direct Expenses ₹4,20,000 | Indirect Expenses ₹2,70,000 | Plant Depreciation ₹85,000 | Notional Profit c/d ₹1,44,000 | Total ₹34,19,000

*Cr Side:* Work Certified ₹32,00,000 | Work Uncertified c/d ₹2,19,000 | Total ₹34,19,000

Notional Profit = ₹34,19,000 – ₹32,75,000 = ₹1,44,000

*Profit Recognition – Year 1:* Degree of completion = ₹32,00,000 / ₹70,00,000 = 45.71% (between 25% and 50%). Profit transferred to P&L = 1/3 × ₹1,44,000 = ₹48,000. Notional Profit Reserve = ₹1,44,000 – ₹48,000 = ₹96,000 (carried forward).

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Step 3 – Contract Account for Year 2

*Dr Side:* Work Uncertified b/d ₹2,19,000 | Materials ₹13,65,000 | Wages ₹11,44,000 | Direct Expenses ₹3,80,000 | Indirect Expenses ₹2,60,000 | Plant Depreciation ₹85,000 | Profit transferred to P&L ₹5,27,000 | Total ₹39,80,000

*Cr Side:* Work Certified (Year 2 increment: ₹70,00,000 – ₹32,00,000) ₹38,00,000 | Escalation Receivable ₹1,80,000 | Total ₹39,80,000

*Profit Recognition – Year 2:* Contract is 100% complete by end of Year 2. Full profit from contract account (₹5,27,000) is recognised. Additionally, Notional Profit Reserve of ₹96,000 from Year 1 is released. Total P&L credit Year 2 = ₹5,27,000 + ₹96,000 = ₹6,23,000.

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Summary of Profits:

Year 1 profit credited to P&L = ₹48,000
Year 2 profit credited to P&L = ₹6,23,000
Total profit over contract life = ₹6,71,000

*Verification:* Total Revenue (₹70,00,000 + ₹1,80,000) – Total Cost (₹65,09,000) = ₹71,80,000 – ₹65,09,000 = ₹6,71,000 ✓

Step 1 – Determine Selling Price of Product Z

Marginal Cost of Product Z = Direct Material + Direct Wages = ₹20 + ₹16 = ₹36 per unit

Product Z is sold at a profit of 20% on its marginal cost:
Selling Price of Z = ₹36 × 1.20 = ₹43.20 per unit

Step 2 – Determine Selling Prices of Products X and Y

Selling Price of X = 1.25 × ₹43.20 = ₹54.00 per unit
Selling Price of Y = 2 × ₹43.20 = ₹86.40 per unit

Step 3 – Marginal Cost per Unit

Product X: DM ₹20 + DW ₹16 = ₹36
Product Y: DM ₹20 + DW ₹24 = ₹44
Product Z: DM ₹20 + DW ₹16 = ₹36

Step 4 – Contribution per Unit

Contribution = Selling Price − Marginal Cost

Product X: ₹54.00 − ₹36 = ₹18.00
Product Y: ₹86.40 − ₹44 = ₹42.40
Product Z: ₹43.20 − ₹36 = ₹7.20

Step 5 – P/V Ratio

Product X: (18 ÷ 54) × 100 = 33.33%
Product Y: (42.40 ÷ 86.40) × 100 = 49.07%
Product Z: (7.20 ÷ 43.20) × 100 = 16.67%

Step 6 – Labour Hours per Unit (@ ₹4 per hour)

Product X: ₹16 ÷ ₹4 = 4 hours
Product Y: ₹24 ÷ ₹4 = 6 hours
Product Z: ₹16 ÷ ₹4 = 4 hours

Step 7 – Contribution per Labour Hour (Key efficiency metric)

Product X: ₹18.00 ÷ 4 = ₹4.50
Product Y: ₹42.40 ÷ 6 = ₹7.07
Product Z: ₹7.20 ÷ 4 = ₹1.80

Step 8 – Total Contribution (at given output levels)

Product X: ₹18 × 2,50,000 = ₹45,00,000
Product Y: ₹42.40 × 2,30,000 = ₹97,52,000
Product Z: ₹7.20 × 3,20,000 = ₹23,04,000
Total Contribution = ₹1,65,56,000

Profitability Analysis & Ranking

Based on P/V Ratio: Y (49.07%) > X (33.33%) > Z (16.67%)
Based on Contribution per Labour Hour: Y (₹7.07) > X (₹4.50) > Z (₹1.80)

Product Y is clearly the most profitable product on both measures. Its selling price is set at double that of Z, and despite higher direct wages (6 hours vs. 4 hours), it yields the best P/V ratio and contribution per key resource unit. Product X, priced at 1.25 times Z, is moderately profitable. Product Z, where the selling price is determined by a 20% mark-up on marginal cost, has the lowest P/V ratio of 16.67% and contributes the least per labour hour at ₹1.80. If direct labour hours are the limiting factor, management should prioritise production of Y first, then X, and finally Z to maximise overall contribution and profitability.

Cost Sheet for the Month Ended April 30, 2023

Working note on opening/closing stock: Units produced = 1,52,000; Units sold = 1,52,600. Since sold > produced by 600 units, opening stock = 600 units. Closing stock = Opening stock + Production − Sales = 600 + 1,52,000 − 1,52,600 = 0 units. Opening stock value = 600 × ₹8.05 = ₹4,830.

Special designs/moulds: ₹1,53,600 ÷ 12 production cycles = ₹12,800 per month (amortised factory overhead).

| Particulars | Total (₹) | Per Unit (₹) |
|---|---|---|
| Raw Materials Purchased | 6,99,000 | |
| Add: Carriage Inward | 36,200 | |
| Raw Materials Consumed (A) | 7,35,200 | 4.84 |
| Direct Wages (B) | 1,32,800 | 0.87 |
| Direct Expenses (C): | | |
| — Royalty paid for production | 35,800 | |
| — Primary packing cost (quality maintenance) | 6,920 | |
| *Total Direct Expenses* | *42,720* | *0.28* |
| PRIME COST (A+B+C) | 9,10,720 | 5.99 |
| Factory Overheads (D): | | |
| — Special designs/moulds/patterns (₹1,53,600÷12) | 12,800 | |
| — Power, fuel and haulage | 70,600 | |
| — R&D costs (amortised, production process) | 31,680 | |
| — Salaries: supervisors and foremen | 28,000 | |
| *Total Factory Overheads* | *1,43,080* | *0.94* |
| FACTORY/WORKS COST (Prime Cost + D) | 10,53,800 | 6.93 |
| Administration Overhead (E) | 46,765 | 0.31 |
| COST OF PRODUCTION (1,52,000 units) | 11,00,565 | 7.24 |
| Add: Opening Stock of Finished Goods (600 × ₹8.05) | 4,830 | |
| Less: Closing Stock of Finished Goods (0 × ₹7.24) | — | |
| COST OF GOODS SOLD (1,52,600 units) | 11,05,395 | |
| Add: Selling & Distribution Expenses (1,52,600 × ₹0.20) | 30,520 | |
| COST OF SALES | 11,35,915 | |

Part (ii) — Selling Price per Unit:

Cost of Production per unit = ₹7.24; S&D per unit = ₹0.20; Total Cost per unit = ₹7.44.

Since profit = 20% on sales, cost represents 80% of selling price.

Selling Price = ₹7.44 × 100/80 = ₹9.30 per unit

Computation of Income-Tax Payable by Mr. Bhagat for A.Y. 2022-23

*(Note: The hospital is treated as operational from 1st April 2021, i.e., F.Y. 2021-22, consistent with the A.Y. 2022-23 computation. The date '1st April 2022' in the question appears to be a typographical error for '1st April 2021'.)*

Step 1 — Deduction under Section 10AA of the Income-tax Act, 1961

The SEZ unit commenced operations in F.Y. 2017-18. F.Y. 2021-22 (A.Y. 2022-23) is the 5th consecutive year of operations. Under Section 10AA(1)(i), 100% of profits derived from exports is deductible in the first 5 years.

Deduction = Profit of SEZ Unit × (Export Turnover ÷ Total Turnover of SEZ Unit)
= ₹36,00,000 × (₹25,00,000 ÷ ₹50,00,000) = ₹18,00,000

Step 2 — Deduction under Section 35AD

The hospital qualifies as a specified business under Section 35AD(8)(d) (hospital with at least 100 beds; 110 beds here satisfies the condition). Capital expenditure of ₹65,00,000 comprises:
- Cost of land: ₹15,00,000 — NOT eligible under Section 35AD (land is expressly excluded from the deduction).
- Cost of building: ₹50,00,000 — Eligible for 100% deduction.

Section 35AD deduction = ₹50,00,000

Step 3 — Computation of Total Income

| Particulars | ₹ |
|---|---|
| Profit from SEZ unit (PGBP) | 36,00,000 |
| Profit from hospital — before Section 35AD | 90,00,000 |
| Less: Deduction under Section 35AD | (50,00,000) |
| Gross Total Income | 76,00,000 |
| Less: Deduction under Section 10AA | (18,00,000) |
| Total Income | 58,00,000 |

Step 4 — Regular Income-Tax (Old Regime; Mr. Bhagat aged 50, below 60 years)

Tax on ₹58,00,000:
- Up to ₹2,50,000 → Nil
- ₹2,50,001–₹5,00,000 @ 5% → ₹12,500
- ₹5,00,001–₹10,00,000 @ 20% → ₹1,00,000
- ₹10,00,001–₹58,00,000 @ 30% → ₹14,40,000
- Tax before surcharge = ₹15,52,500
- Surcharge @ 10% (Total Income > ₹50L but < ₹1Cr) = ₹1,55,250
- Tax + Surcharge = ₹17,07,750
- Health & Education Cess @ 4% = ₹68,310
- Regular Tax = ₹17,76,060

Step 5 — Alternate Minimum Tax (AMT) under Section 115JC

AMT applies as Mr. Bhagat has claimed deductions under Section 10AA and Section 35AD (Section 115JEE conditions met; ATI > ₹20 lakhs threshold).

Adjusted Total Income (ATI):

| Particulars | ₹ |
|---|---|
| Total Income | 58,00,000 |
| Add: Section 10AA deduction [Section 115JC(2)(ii)] | 18,00,000 |
| Add: Section 35AD deduction [Section 115JC(2)(iii)] | 50,00,000 |
| Less: Normal depreciation on building under Section 32 (10% × ₹50,00,000) | (5,00,000) |
| Adjusted Total Income | 1,21,00,000 |

AMT @ 18.5% on ₹1,21,00,000 = ₹22,38,500
Surcharge @ 15% (ATI > ₹1 crore) = ₹3,35,775
AMT + Surcharge = ₹25,74,275
Health & Education Cess @ 4% = ₹1,02,971
Total AMT = ₹26,77,246

Step 6 — Final Tax Payable and AMT Credit

Since AMT (₹26,77,246) > Regular Tax (₹17,76,060), Mr. Bhagat is liable to pay ₹26,77,246 as income-tax for A.Y. 2022-23.

Under Section 115JEE, AMT credit = ₹26,77,246 − ₹17,76,060 = ₹9,01,186, which can be carried forward for set-off in up to 15 subsequent assessment years (in years when regular tax exceeds AMT).

Computation of Taxable Salary of Mr. Rohan for A.Y. 2023-24 (Previous Year 2022-23)

Basic Salary: ₹25,000 × 12 months = ₹3,00,000

Dearness Allowance: 50% × ₹25,000 × 12 = ₹1,50,000

Gratuity [Section 10(10)(ii) of the Income Tax Act, 1961]:
Mr. Rohan is covered under the Payment of Gratuity Act, 1972. Exemption is the least of three limits:
(a) Actual gratuity received = ₹7,50,000
(b) Statutory maximum = ₹20,00,000
(c) 15/26 × Last drawn salary × Completed years of service
= 15/26 × ₹37,500 × 28 = ₹6,05,769

Note: Last drawn salary under PGA = Basic + DA = ₹25,000 + ₹12,500 = ₹37,500. Completed years = 28 (3 months < 6 months, not rounded up under PGA).

Exemption = ₹6,05,769; Taxable Gratuity = ₹7,50,000 − ₹6,05,769 = ₹1,44,231

Leave Encashment [Section 10(10AA)(ii)]:
For non-government employees, exemption is the least of:
(a) Actual amount received = ₹3,25,000
(b) Statutory limit for A.Y. 2023-24 = ₹3,00,000
(c) 10 months' average salary = 10 × ₹25,000 = ₹2,50,000 (DA excluded as it does not form part of retirement benefits)
(d) Cash equivalent of leave to credit = ₹25,000/30 × 260 days = ₹2,16,667

Note: Leave to credit capped at 30 days × 28 completed years = 840 days; actual 260 days is lower, so 260 days used. Completed years of service = 28.

Exemption = ₹2,16,667; Taxable Leave Encashment = ₹3,25,000 − ₹2,16,667 = ₹1,08,333

Crockery Set [Rule 3(7)(iv) of Income Tax Rules, 1962]:
Gifts in kind from employer are exempt up to ₹5,000 per annum in aggregate. Since ₹4,500 < ₹5,000, the crockery set is fully exempt — NIL taxable.

Motor Car Perquisite [Rule 3(2) of Income Tax Rules, 1962]:
The car (1800cc, > 1600cc) was used exclusively for personal purposes. The employer bore fuel, repairs, and driver's salary. Perquisite = Actual expenditure + Normal wear and tear:
— Normal wear and tear (depreciation) = 10% × ₹5,00,000 = ₹50,000
— Driver salary = ₹10,000 × 12 = ₹1,20,000
Total motor car perquisite = ₹1,70,000

(Fuel and repair actual amounts are not separately quantified in the problem; depreciation is explicitly prescribed at 10% p.a. on actual cost under Rule 3(2).)

Standard Deduction [Section 16(ia)]: ₹50,000 (applicable under old regime; Mr. Rohan has not opted for Section 115BAC)

Taxable Salary = ₹9,22,564

Computation of Total Income of Mr. Chaman, Mrs. Chaman, Miss Naina and Master Neelabh for AY 2023-24 (PY 2022-23)

Preliminary Notes on Clubbing:

Gift by Mrs. Chaman to Mr. Chaman [Section 64(1)(iv) of the Income Tax Act, 1961]: Mrs. Chaman gifted ₹2,00,000 (Stridhan) to Mr. Chaman without adequate consideration. Mr. Chaman invested the entire gifted amount in the stock market and suffered a Short-Term Capital Loss (STCL) of ₹5,10,000. Under Section 64(1)(iv), since the entire investment is traceable to the gifted amount, the entire STCL of ₹5,10,000 is clubbed in Mrs. Chaman's hands (transferor-spouse). Mr. Chaman cannot claim this loss in his own computation.

Minor Children's Income [Section 64(1A)]: All income of a minor child is clubbed with the parent having the higher total income, except income arising from (a) manual work, or (b) any activity involving application of skill, talent, or specialized knowledge.

- Miss Naina's quiz competition income ₹3,56,000: This is earned by applying her own skill and specialized knowledge. It is exempt from clubbing under the proviso to Section 64(1A) and is assessed in Naina's own hands.
- Miss Naina's savings bank interest ₹15,000: This is passive income from investing her earnings — not from skill/talent. It IS clubbed with the parent having higher income.
- Master Neelabh's FD interest ₹35,000: Passive income from FD. It IS clubbed with the parent having higher income.

Determining higher-income parent: Mr. Chaman's income ₹11,00,000 > Mrs. Chaman's income ₹2,90,000. Hence, both children's passive incomes are clubbed with Mr. Chaman.

Section 10(32): An exemption of ₹1,500 per minor child is available in the hands of the parent with whom income is clubbed.

Section 80U — Master Neelabh: Section 80U requires a minimum certified disability of 40%. Neelabh's disability is only 7%, which does not meet the threshold. No deduction under Section 80U is available.

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Mr. Chaman — Total Income:

Salary income: ₹11,00,000
Add: Naina's savings bank interest clubbed [₹15,000 − ₹1,500 (Section 10(32))]: ₹13,500
Add: Neelabh's FD interest clubbed [₹35,000 − ₹1,500 (Section 10(32))]: ₹33,500
Gross Total Income: ₹11,47,000
Less: Deduction under Section 80TTA (savings bank interest, max ₹10,000; Mr. Chaman is 50 years, below 60, so 80TTA and not 80TTB applies): ₹10,000
Total Income of Mr. Chaman: ₹11,37,000

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Mrs. Chaman — Total Income:

Income from Kathak performances: ₹2,50,000
Long-term capital gains (LTCG) from shares: ₹5,50,000
Less: Clubbed STCL [Section 64(1)(iv), set-off of STCL against LTCG permitted under Section 70]: (₹5,10,000)
Net LTCG: ₹40,000
Total Income of Mrs. Chaman: ₹2,90,000

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Miss Naina — Total Income:

Income from quiz competitions (own skill — not clubbed): ₹3,56,000
Savings bank interest: Clubbed with Mr. Chaman — NIL in Naina's hands
Total Income of Miss Naina: ₹3,56,000

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Master Neelabh — Total Income:

FD interest: Clubbed with Mr. Chaman — NIL in Neelabh's hands
Section 80U: Not applicable (7% disability < 40% minimum threshold)
Total Income of Master Neelabh: NIL

Note on Assessment Year: The question states AY 2022-23, but all transactions and repayments relate to FY 2022-23 (loan 2 is taken on 31st October 2022, and repayments are stated as FY 2022-23). Accordingly, the deductions are computed for AY 2023-24 (FY 2022-23).

Deduction under Section 24(b) of the Income Tax Act, 1961 — Interest on Home Loan (Deduction from House Property Income):

Mr. Ray holds a self-occupied property (first and only residential house). Under Section 24(b), interest on loan taken for purchase/construction of a self-occupied house is deductible up to a maximum of ₹2,00,000 per annum (where loan is taken on or after 1st April 1999 and the property is acquired within 5 years). Interest paid during FY 2022-23 = ₹1,61,000, which is within the ₹2,00,000 ceiling. Deduction: ₹1,61,000.

Deduction under Section 80C — Principal Repayment of Home Loan:

Repayment of principal on a housing loan from a scheduled bank for purchase of a residential house qualifies under Section 80C. Principal repaid = ₹1,23,000. The overall ceiling under Section 80C is ₹1,50,000. No other 80C investments are mentioned. Deduction: ₹1,23,000 (within limit).

Deduction under Section 80EEA — Additional Interest on Affordable Housing Loan:

Section 80EEA provides an additional deduction (over and above Section 24(b)) up to ₹1,50,000 on interest on a loan from a financial institution for purchase of a residential house, subject to: (i) loan sanctioned between 1st April 2019 and 31st March 2022 — loan sanctioned on 1st March 2022 ✓; (ii) stamp duty value of house ≤ ₹45,00,000 — ₹24,00,000 ✓; (iii) assessee does not own any other residential house on the date of sanction — first and only house ✓; (iv) not eligible for deduction under Section 80EE (that section applies to loans sanctioned April 2016–March 2017 only) ✓. Interest paid = ₹1,61,000; deduction under 80EEA is limited to ₹1,50,000. This deduction is in addition to the ₹1,61,000 allowed under Section 24(b). Deduction: ₹1,50,000.

Deduction under Section 80EEB — Interest on Electric Vehicle Loan:

Section 80EEB allows deduction of interest paid on a loan sanctioned by a financial institution for purchase of an electric vehicle, up to ₹1,50,000, where the loan is sanctioned between 1st April 2019 and 31st March 2023. Loan sanctioned on 31st October 2022 ✓; from a scheduled bank ✓. The section is available for vehicles for personal use as well. Interest paid = ₹1,00,000, within the ₹1,50,000 ceiling. Deduction: ₹1,00,000.

Deduction under Section 80GGC — Contribution to Political Party:

Section 80GGC allows deduction for contributions to a political party. However, the proviso to Section 80GGC explicitly disallows any deduction for contributions made by way of cash. Since ₹15,000 was paid entirely in cash, no deduction is available.

Summary of Deductions:
- Section 24(b) — Interest on home loan: ₹1,61,000
- Section 80C — Principal repayment: ₹1,23,000
- Section 80EEA — Additional housing loan interest: ₹1,50,000
- Section 80EEB — EV loan interest: ₹1,00,000
- Section 80GGC — Political party (cash): NIL

Total deductions: ₹5,34,000 (₹1,61,000 under Section 24(b) + ₹3,73,000 under Chapter VI-A).

Time Limit for Filing Updated Return (Section 139(8A)): An updated return can be filed before the end of the relevant year or before furnishing of a response to a notice under Section 142(1), whichever is earlier. The relevant year refers to the assessment year following the previous year. For instance, an updated return for the financial year 2024-25 can be filed up to 31st March 2026 (end of AY 2025-26) or before furnishing a response to Section 142(1) notice, whichever occurs first. This provides taxpayers with flexibility to correct unintentional errors made in their original or belated returns within a reasonable timeframe.

Circumstances When Updated Return Cannot Be Furnished (Section 139(8B)):

1. Return Already Processed: An updated return cannot be furnished if the original return has already been processed under Section 143(1) (intimation of income) or Section 143(3) (completion of assessment). Once the income tax officer has issued an intimation or completed the assessment, the period for filing an updated return closes. This prevents procedural complications and ensures finality.

2. Updated Return Already Filed: An updated return cannot be furnished in respect of any previous year for which an updated return has already been furnished under Section 139(8A) or Section 139(8B). Only one updated return is permitted per previous year to maintain discipline and prevent abuse of the provision.

3. Implicit Restriction - Response to Section 142(1) Notice: While not explicitly listed in Section 139(8B), the time limit itself creates a constraint: an updated return cannot be filed after furnishing a response to a Section 142(1) notice. This is because the time limit terminates upon furnishing such a response.

4. Notice Under Section 143(3): If a notice under Section 143(3) has been issued, the return is considered 'processed,' and an updated return cannot be filed subsequently. The policy intent is to prevent reopening of assessments through the updated return mechanism once formal assessment proceedings have commenced.

Analysis of GST Treatment for Jiao Enterprises – October 2022

(i) Intra-State Supply of Air Conditioner with Separately Charged Freight

As per Section 15(2)(c) of the CGST Act, 2017, the value of supply shall include any amount charged for anything done by the supplier in respect of the supply at the time of or before delivery of goods. Freight charges for delivery at the customer's doorstep are directly incidental to the supply of goods. Therefore, even though freight is charged separately in the invoice, it shall be included in the taxable value of the goods.

Taxable Value = ₹4,00,000 + ₹1,00,000 = ₹5,00,000 (Intra-state; CGST + SGST applicable @ 28% on AC)

(ii) Intra-State Repairing Service with Parts/Spares

This transaction constitutes a composite supply under Section 2(30) of the CGST Act, 2017 — two or more taxable supplies that are naturally bundled and supplied in conjunction with each other in the ordinary course of business. The principal supply is the air-conditioner repair service, and the supply of parts/spares is ancillary to it. As per Section 8(a) of the CGST Act, 2017, a composite supply shall be treated as a supply of the principal supply. Hence, the entire consideration is taxed as a service.

Taxable Value = ₹3,00,000 + ₹50,000 = ₹3,50,000 (Intra-state; CGST + SGST applicable @ 18% — repair/maintenance services)

(iii) Inter-State Supply of Combo Offer (Air Conditioner + Stabilizer)

An air conditioner and a stabilizer are independent goods — they are not naturally bundled and can be purchased separately. Supplying them together at a single combo price constitutes a mixed supply under Section 2(74) of the CGST Act, 2017. As per Section 8(b) of the CGST Act, 2017, a mixed supply is treated as a supply of that particular supply which attracts the highest rate of tax.

Air conditioner attracts GST @ 28% and stabilizer attracts GST @ 18%. Since the AC rate is higher, the entire combo supply is taxed at 28% IGST (being inter-state supply).

Taxable Value = 10 × ₹20,000 = ₹2,00,000; IGST = 28% × ₹2,00,000 = ₹56,000

Note: The discounted combo price of ₹20,000 (and not the original ₹30,000) is the transaction value as per Section 15(1) of the CGST Act, 2017, since it is the price actually paid/payable when parties are unrelated and price is the sole consideration.

Part (i): Standard Price per kg and Standard Quantity of Raw Material

Step 1 — Actual Price per kg
Actual price (AP) = ₹3,15,500 ÷ 25,000 kg = ₹12.62 per kg

Step 2 — Standard Price per kg using Material Price Variance (MPV)
The formula for MPV is: MPV = (Standard Price − Actual Price) × Actual Quantity
12,500 (F) = (SP − 12.62) × 25,000
SP − 12.62 = 12,500 ÷ 25,000 = 0.50
Standard Price (SP) = ₹13.12 per kg

Step 3 — Material Usage Variance (MUV)
Material Cost Variance (MCV) = MPV + MUV
−1,800 = 12,500 + MUV
MUV = −14,300 (Adverse)

Step 4 — Standard Quantity using MUV
MUV = (Standard Quantity − Actual Quantity) × Standard Price
−14,300 = (SQ − 25,000) × 13.12
SQ − 25,000 = −14,300 ÷ 13.12 = −1,090.24
Standard Quantity (SQ) = 23,910 kg (approx.)

This can be cross-verified via MCV directly:
SQ × SP = Actual Cost − MCV (adverse)
SQ × 13.12 = 3,15,500 − 1,800 = 3,13,700
SQ = 3,13,700 ÷ 13.12 = 23,910 kg (approx.)

This standard quantity corresponds to the actual output of approximately 1,91,280 units (23,910 kg × 8 units/kg), against which the standard material cost would be ₹3,13,699 (≈ ₹3,13,700).

Summary: Standard Price per kg = ₹13.12 | Standard Quantity = 23,910 kg

(i) Miss Tara — Section 194R Analysis

Section 194R of the Income Tax Act, 1961 (inserted by Finance Act 2022) requires any person providing a benefit or perquisite (whether in cash or in kind) to a resident, arising from that resident's business or profession, to deduct TDS @ 10% before providing such benefit. The provision is triggered when the aggregate value of such benefit exceeds ₹20,000 in a financial year. Section 194R is effective from 01 July 2022.

In Miss Tara's case, the car worth ₹5,00,000 was handed over on 19 December 2021, which is before the effective date of Section 194R. Therefore, Section 194R is not applicable to this transaction, and XYZ Ltd. had no TDS obligation on 19 December 2021.

Further, CBDT Circular No. 12/2022 (issued on 16 June 2022 to clarify Section 194R) specifically addresses social media influencers: if the product is returned to the company after review/promotion, it does not constitute a 'benefit or perquisite' in the hands of the influencer, so Section 194R does not apply even post 01.07.2022. Since Miss Tara returned the car after 7 months, even had the transaction occurred after 01.07.2022, no TDS would have been required by XYZ Ltd.

Conclusion: No TDS is deductible by XYZ Ltd. — firstly, because the transaction predates Section 194R; and secondly, because the car was ultimately returned.

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(ii) Ms. Aruna — Section 194C Analysis

Section 194C of the Income Tax Act, 1961 mandates TDS on payments to resident contractors for carrying out any work, including supply of labour. However, individuals and HUFs are required to deduct TDS under Section 194C only if their accounts were subject to audit under Section 44AB in the immediately preceding financial year.

Ms. Aruna is an individual who is a CEO drawing salary. A salaried individual does not attract audit under Section 44AB. Moreover, the payments to Ms. Suresh are for personal household purposes (housing staff). Since Ms. Aruna does not satisfy the audit condition, Section 194C does not apply to her. The magnitude of the payments (₹25,00,000 and ₹30,00,000) is irrelevant when the payer does not fall within the specified category.

TDS = NIL in the first situation.

Alternate scenario (businesswoman, unaudited books): Even as a businesswoman, if Ms. Aruna's books of account were not audited under Section 44AB in the immediately preceding financial year, the condition for applicability to individuals is not satisfied. The answer remains the same — no TDS obligation. Section 194C is triggered for individuals/HUFs only upon fulfilment of the audit condition, regardless of the payment amount.

Conclusion: No TDS is deductible by Ms. Aruna in either situation.

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(iii) ABCC Pvt Ltd — Section 194C Analysis

Under Section 194C of the Income Tax Act, 1961, TDS must be deducted on payments made to resident contractors for 'work'. The definition of 'work' under Section 194C explicitly includes catering. ABCC Pvt Ltd. is engaged in supply of food, water, and snacks — a catering arrangement — to the employees of the Nationalized Bank.

A Nationalized Bank is a specified person under Section 194C (falling under 'companies'). The monthly payment of ₹60,000 exceeds the threshold of ₹30,000 per single payment. Accordingly, TDS is applicable from the very first payment.

Since ABCC Pvt Ltd. is a company, the applicable TDS rate is 2%.

TDS per month = 2% × ₹60,000 = ₹1,200

Annual TDS = ₹1,200 × 12 = ₹14,400

The Nationalized Bank must deduct TDS @ 2% at the time of credit or payment, whichever is earlier, and deposit the same to the Government account within the prescribed due dates.

The relevant provision governing GST on hospital services is Entry 74 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 under the Central Goods and Services Tax Act, 2017 (CGST Act). This entry exempts health care services provided by a clinical establishment from GST. "Health care services" means any service by way of diagnosis, treatment or care for illness, injury, deformity, abnormality or pregnancy. A "clinical establishment" includes a hospital, nursing home, clinic or any institution offering services requiring diagnosis or treatment. Suraskha Hospital qualifies as a clinical establishment. The GST treatment of each charge is as follows:

(i) Room Rent ₹7,000 per day for 2 days (Total ₹14,000): As per the amendment introduced by Notification No. 04/2022-Central Tax (Rate) dated 13.07.2022 (effective 18.07.2022), room rent (excluding ICU/CCU/ICCU/NICU) exceeding ₹5,000 per day per patient charged by a hospital is specifically excluded from the exemption under Entry 74. Since ₹7,000 per day exceeds the threshold of ₹5,000 per day, the room rent is not exempt and GST is applicable at 5% (without ITC) on the full room rent amount. Total GST = ₹14,000 × 5% = ₹700.

(ii) Operation Theatre Charges ₹5,000: Operation theatre charges are directly and integrally related to the surgical procedure (removal of kidney stones), which is a treatment service for illness. These charges form part of the composite supply of health care services where the principal supply is the healthcare service itself. No specific carve-out exists for OT charges in the exemption notification. Accordingly, OT charges are fully exempt from GST under Entry 74 of Notification 12/2017-CT(R).

(iii) Doctors Consultation Charges ₹8,000: Services rendered by an authorised medical practitioner by way of diagnosis and treatment fall squarely within the definition of health care services. Doctor consultation charges (including pre- and post-operative consultation during inpatient stay) are fully exempt from GST under Entry 74 of Notification 12/2017-CT(R). No GST should be levied on this amount.

(iv) Medicines ₹4,000: Medicines supplied to Mr. Das during his inpatient stay are supplied as part of the treatment package. This constitutes a composite supply under Section 2(30) of the CGST Act, where the principal supply is health care services (exempt). As per Section 8(a) of the CGST Act, the entire composite supply is taxed at the rate applicable to the principal supply. Since health care services are exempt, the supply of medicines bundled with inpatient treatment is also exempt from GST. (Note: If medicines were sold separately at a pharmacy counter to an outpatient, they would attract GST at applicable goods rates; however, in this inpatient context, they are exempt.)

Summary: GST is leviable only on room rent (₹14,000 at 5% = ₹700). Operation theatre charges, doctor consultation charges, and medicines supplied as part of inpatient treatment are all exempt from GST.

Important Note: The question as provided contains only partial data — specifically, wage/labour hours and rates for two years (Year 1: 10,000 hours @ ₹125/hr; Year 2: 8,800 hours @ ₹130/hr). A complete Contract Costing problem with an escalation clause requires: the original contract price, estimated quantities and rates for both materials and wages (the base rates for the escalation clause), actual material quantities and rates consumed each year, plant and overhead costs, and the specific terms of the escalation clause. The material data appears to be missing from the question as submitted. The following solution provides the complete methodology and solves all wage-related components; material-related figures are presented as placeholders pending the full question.

(i) Contract Account for Both Years — Without Escalation Clause

In Contract Costing, a separate Contract Account is maintained for each accounting period. The Dr side records all costs incurred (materials, wages, plant, overhead, notional profit), and the Cr side records value of work certified, plant returned, and closing work-in-progress (WIP).

Wage entries that can be determined:
- Year 1 Wages: 10,000 hours × ₹125 = ₹12,50,000
- Year 2 Wages: 8,800 hours × ₹130 = ₹11,44,000

The remaining line items (materials, plant, overhead, contract price/WIP, profit recognition using the completion method or notional profit method) require the full data set to populate. Once all cost data is available, profit is recognised in Year 1 and Year 2 proportionately using: Profit to P&L = Notional Profit × (Cash received / Work certified) × (2/3).

(ii) Total Contract Value — With Escalation Clause

An escalation clause protects the contractor against unforeseen increases in input prices. The contract price is revised upward to the extent that actual input prices exceed the base/estimated rates specified in the contract. Note: escalation applies to price variance only, not quantity variance.

Formula: Total Contract Value = Original Contract Price + Escalation on Materials + Escalation on Wages

Wage escalation (assuming base rate of ₹120/hr as per standard version of this question):
- Year 1: (₹125 − ₹120) × 10,000 hrs = ₹5 × 10,000 = ₹50,000
- Year 2: (₹130 − ₹120) × 8,800 hrs = ₹10 × 8,800 = ₹88,000
- Total wage escalation = ₹1,38,000

Material escalation = (Actual rate − Base rate) × Actual quantity consumed — requires material data.

Total Contract Value = Original Price + Material Escalation + ₹1,38,000

(iii) Total Increase/(Decrease) in Cost of Material and Wages — Both Years Combined

Wages:
- Estimated wages (18,800 hrs × ₹120) = ₹22,56,000
- Actual wages (₹12,50,000 + ₹11,44,000) = ₹23,94,000
- Increase in wages = ₹1,38,000

Materials: Requires estimated and actual quantity/rate data to compute. The increase = (Actual rate × Actual qty) − (Estimated rate × Estimated qty) for both years combined.

Conclusion: Based on the wage data provided, total increase in wage cost over both years is ₹1,38,000, which is entirely due to the rise in wage rate (price variance), and this amount is recoverable under the escalation clause. To complete Parts (i), (ii), and (iii) fully, the material cost data, contract price, overhead details, and escalation clause base rates must be provided.

Provisions of Order of Discharge of GST Liability under Section 49(8) of the CGST Act, 2017

Note: The order of discharge of tax liability is governed by Section 49(8) of the CGST Act, 2017 (the question references Section 49(3) which deals with use of Electronic Cash Ledger; the specific order of discharge mandate is contained in Section 49(8)). This provision is mandatory and does not permit the taxpayer to choose the order of discharge.

Section 49(8) — Mandatory Order of Discharge

Every taxable person shall discharge his tax and other dues under the CGST Act in the following prescribed sequence:

(a) First: Self-assessed tax and other dues related to returns of previous tax periods (i.e., tax, interest, penalty, late fee for earlier months).

(b) Second: Self-assessed tax and other dues related to the return of the current tax period.

(c) Third: Any other amount payable under the Act, including demand determined under Section 73 or Section 74 of the CGST Act.

This sequence is statutory and non-discretionary — a registered person cannot deviate from this order.

Application to Mr. Manik's Case

Mr. Manik has the following liabilities recorded in his Electronic Liability Register:

| Particulars | Amount (₹) | Category |
|---|---|---|
| Tax for May | 25,000 | Previous period (Step 1) |
| Interest for May | 2,000 | Previous period (Step 1) |
| Penalty for May | 3,000 | Previous period (Step 1) |
| Tax for June | 35,000 | Current period (Step 2) |
| Demand u/s 73 | 48,000 | Other dues (Step 3) |
| Total | 1,13,000 | |

Mandatory Order of Payment for Mr. Manik:

Step 1: First discharge all liabilities of May (previous period) — ₹25,000 (tax) + ₹2,000 (interest) + ₹3,000 (penalty) = ₹30,000.

Step 2: Then discharge June tax (current period) = ₹35,000.

Step 3: Only thereafter, discharge the demand under Section 73 = ₹48,000.

Advice to Mr. Manik: Mr. Manik's desire to clear the demand notice under Section 73 first is not permissible under law. Section 49(8) of the CGST Act, 2017 mandates a fixed order of discharge — previous period self-assessed dues must be cleared before current period dues, and current period dues must be cleared before demand-based liabilities. The demand under Section 73 falls in the last priority (Step 3). Any payment made by Mr. Manik will be applied in the statutory sequence irrespective of his preference. He must ensure he pays ₹1,13,000 in the prescribed order to fully discharge all his liabilities.

Sub-part (A): Conditions and Restrictions of QRMP Scheme

The Quarterly Return Monthly Payment (QRMP) Scheme under GST (introduced vide Notification No. 84/2020-CT) allows eligible registered persons to file GSTR-1 and GSTR-3B on a quarterly basis while paying tax monthly. The following conditions and restrictions apply:

Eligibility Condition: A registered person whose aggregate annual turnover (AATO) in the preceding financial year is up to ₹5 crore is eligible to opt for the QRMP scheme. If turnover exceeds ₹5 crore during the current year, the taxpayer is liable to file returns monthly from the following month.

Prior Filing Condition: To opt for the scheme, the taxpayer must have filed GSTR-3B for the preceding month. In Mr. Sumit's case, if he wishes to opt in May (for the July–September 2025 quarter), he must have filed GSTR-3B for April.

Timing of Opt-In: The option to avail or withdraw from the scheme can be exercised on the GST portal from the 1st day of the 2nd month of the preceding quarter to the last day of the 1st month of the current quarter (e.g., for Q2 July–September, the option window is 1st May to 31st July).

Applicability across GSTINs: The option, once exercised, is applicable to all GSTINs registered on the same PAN in the same state, and applies to all future quarters unless changed.

Regarding Mr. Sumit's non-filing of May and June returns: Under the QRMP scheme, GSTR-3B is filed quarterly (not monthly). Therefore, Mr. Sumit is not required to file separate monthly GSTR-3B returns for May and June — this is correct under the scheme. However, he is still required to pay tax monthly for the first two months of each quarter (i.e., for May and June) using Form PMT-06, which is a crucial compliance requirement he must not overlook.

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Sub-part (B): Manner of Discharge of Tax Liability under QRMP Scheme

For the first two months of each quarter (e.g., Month 1: April and Month 2: May of the April–June quarter), the registered person under QRMP must discharge tax liability via Form PMT-06 (Payment Challan). No GSTR-3B is filed for these months. Two options are available:

Option 1 — Fixed Sum Method (35% Method):
The taxpayer pays an amount equal to 35% of the net cash tax liability paid in cash (i.e., net of ITC) in the return for the last quarter (if previously a quarterly filer). If the person was a monthly filer transitioning to QRMP, the amount equals 100% of the tax paid in cash in the last month of the preceding quarter (i.e., the 3rd month). This method is simple and avoids detailed computation.

Option 2 — Self-Assessment Method:
The taxpayer computes the actual tax liability for the relevant month based on outward supplies made, minus eligible Input Tax Credit (ITC) available, and pays the net cash tax liability accordingly. This method is suitable when liability in the current month significantly differs from the past.

For the Third Month of the Quarter: The taxpayer must file GSTR-3B (the quarterly return) covering all three months, compute the actual tax liability for the entire quarter, set off ITC, and pay any balance remaining after the PMT-06 payments made in months 1 and 2. Any excess payment made during months 1 and 2 is available as credit and will be reflected in the ledger.

Invoice Furnishing Facility (IFF): Optionally, for the first two months of the quarter, Mr. Sumit may use the IFF to upload B2B invoice details, enabling recipients to claim ITC without waiting for the quarterly GSTR-1. IFF is optional and does not replace GSTR-1.

In summary, Mr. Sumit must ensure (i) eligibility by turnover, (ii) prior month GSTR-3B filed before opt-in, (iii) monthly tax payments via PMT-06 for May and June using either the Fixed Sum or Self-Assessment method, and (iv) quarterly filing of GSTR-3B and GSTR-1 for the April–June quarter by the due date.

The statement is invalid or partially incorrect under GST Laws. When goods are transferred by a principal to a job worker, an e-way bill IS required in most circumstances. According to Rule 10 of Notification 16/2017-CT (dated 06-07-2017), an e-way bill is mandatorily required for movement of goods exceeding ₹50,000 in value or for interstate movement. The transfer of goods from a principal to a job worker constitutes a supply under Section 7 of the CGST Act 2017. A job worker is defined in Rule 47A of the CGST Rules 2017 as a person who undertakes to perform any process or activity on goods supplied by the principal and returns them after completion. The exemptions provided in the e-way bill notification are limited and specific in nature. They do not broadly exempt all job worker transfers. For example, Rule 10(11) provides exemption only for goods transferred on instruction of a supplier for on-site job work at the customer's location, which is distinct from the principal-job worker relationship. Therefore, the correct position is that an e-way bill is required for transfer of goods by principal to job worker unless the specific exemption criteria are satisfied. The statement suggesting no e-way bill is needed is not valid under current GST Laws. The onus lies on the principal to determine whether the transfer qualifies for any specific exemption.

Important Note: This question as presented is incomplete. A standard ICAI CA Intermediate budgeting question of this type requires a product-wise data table specifying — for each product (X, Y, Z) — the current year sales quantity, selling price per unit, direct material cost per unit, direct labour hours per unit, and direct labour rate per hour. That table appears to have been omitted from the question as provided here.

The methodology and framework for solving such a question (once the base data is available) is set out below.

Step 1 — Separate Fixed and Variable Overhead (Current Year)

Using the product data table, compute total current-year direct labour hours:
Total DLH = (Units of X × LH per unit of X) + (Units of Y × LH per unit of Y) + (Units of Z × LH per unit of Z)

Variable overhead (current year) = Total DLH × ₹1
Fixed overhead (current year) = ₹32,80,000 − Variable overhead

Step 2 — Compute Next-Year Volumes

Units of X (next year) = Current units × 1.12
Units of Y (next year) = Current units × 0.95
Units of Z (next year) = Current units × 1.15

Total DLH (next year) = Revised units × respective LH per unit (unchanged)
Variable overhead (next year) = Total DLH (next year) × ₹1

Step 3 — Derive Fixed Overhead (Next Year)

Fixed overhead (next year) = ₹55,08,000 − Variable overhead (next year)

(Note: If the problem intends fixed overhead to remain unchanged, then any increase in total overhead beyond variable is due to a stated revision in fixed costs. Use whichever basis the original data specifies.)

Step 4 — Overhead Absorption Rate (OAR)

Fixed OAR per DLH = Fixed overhead ÷ Total DLH (for each respective year)
Variable OAR per DLH = ₹1 (given, unchanged)

Step 5 — Contribution per Unit

For each product: Contribution = Selling Price − (Direct Material + Direct Labour + Variable Overhead)
Variable overhead per unit = DLH per unit × ₹1

Step 6 — Marginal Costing Statement Format

For both Current Year and Next Year, prepare the following table:

| Particulars | Product X | Product Y | Product Z | Total |
|---|---|---|---|---|
| Sales (units) | — | — | — | — |
| Sales revenue (₹) | — | — | — | — |
| Less: Variable costs | — | — | — | — |
| — Direct Material | — | — | — | — |
| — Direct Labour | — | — | — | — |
| — Variable Overhead (@ ₹1/DLH) | — | — | — | — |
| Contribution | — | — | — | — |
| Less: Fixed Overhead (total) | | | | — |
| Profit | | | | — |

Note: Under marginal costing, fixed overhead is deducted as a period cost from total contribution, not absorbed product-wise. If absorption costing is required, fixed OAR is applied per unit using DLH, and any over/under absorption is adjusted.

Final Answer cannot be computed without the missing product-wise base data table (units, selling prices, and cost structure for X, Y, Z). Once that data is substituted into the above framework, all numerical values flow directly.

Inventory Position Analysis — SN Manufacturing Limited (April 2023)

Based on the available data, the inventory position of SN Manufacturing Limited as at April 2023 can be analyzed across three inventory categories:

1. Raw Materials Inventory

The raw materials stock has decreased from ₹42,500 (April 1) to ₹38,600 (April 30), reflecting a net reduction of ₹3,900 (approximately 9.18%). This decline indicates that raw materials were consumed in the production process during the month. The reduction in raw material stock—without knowing purchases made during the month—suggests either active utilization of existing stock in manufacturing, or that purchases were insufficient to maintain the opening stock level. This position warrants monitoring to ensure no stock-out risk in subsequent periods.

2. Work-in-Progress (WIP) Inventory

WIP has shown a marginal increase from ₹42,500 to ₹42,800, a rise of ₹300 (0.71%). This near-stable WIP position suggests that the production cycle is relatively consistent — goods entering the process are being completed and transferred to finished goods at approximately the same rate. A slightly higher closing WIP indicates that at month-end, slightly more partially processed units remained in the pipeline. This is not a concern and reflects normal production continuity.

3. Finished Goods Inventory

The opening stock of finished goods was 2,500 units on April 1, 2023. However, the closing stock as at April 30 is not provided in the given data, which limits a complete analysis of this segment. To fully assess the finished goods position, data on units produced during April and units sold (cost of goods sold) would be required using the standard formula:

*Closing Stock = Opening Stock + Units Produced − Units Sold*

Overall Inventory Observations

The combined opening inventory stood at ₹42,500 (RM) + ₹42,500 (WIP) + finished goods value (not given) = at least ₹85,000 in monetary terms (excluding finished goods value). The closing monetary inventory is ₹38,600 (RM) + ₹42,800 (WIP) = ₹81,400. The overall inventory in monetary terms (RM + WIP) has decreased by ₹3,600, indicating that input resources are being converted into finished output — a sign of productive operations.

As per AS 2 — Valuation of Inventories, inventories should be valued at the lower of cost and net realisable value. The inventory movement analysis above is consistent with normal manufacturing activity, though a complete assessment requires the closing finished goods quantity and the cost/NRV comparison for all categories.

Conclusion: The inventory position reflects active production with stable WIP, declining raw material levels (suggesting good material utilization), and an incomplete picture on finished goods due to missing data.

Persons Not Eligible to Opt for Composition Scheme for Goods under CGST & SGST Rules

The composition scheme for goods is governed by Section 10 of the Central Goods and Services Tax (CGST) Act, 2017 read with Rule 5 of the CGST Rules, 2017. While the scheme provides relief to small taxpayers, certain persons are specifically excluded from its scope. The following categories of registered persons are not eligible to opt for the composition scheme:

1. Casual Taxable Person or Non-Resident Taxable Person
A casual taxable person (one who occasionally undertakes transactions in a state where he has no fixed place of business) and a non-resident taxable person (one who occasionally undertakes transactions in India but has no fixed place of business in India) cannot opt for the composition scheme. [Section 10(2)(a)]

2. Persons Engaged in Supply of Services (other than restaurant-type services)
A person who supplies services — other than the supply of food or drinks for human consumption (i.e., restaurant services as referred to in clause (b) of paragraph 6 of Schedule II of the CGST Act) — is not eligible for the goods composition scheme under Section 10(1). Note: A separate composition scheme under Section 10(2A) is available to pure service providers or mixed suppliers (goods + services) with turnover up to ₹50 lakhs.

3. Persons Making Supply of Goods Not Leviable to Tax
A person who makes any supply of non-taxable goods (i.e., goods on which no GST is leviable under the CGST Act, such as petroleum crude, natural gas, alcohol for human consumption, etc.) is not eligible. [Section 10(2)(b)]

4. Persons Making Inter-State Outward Supplies of Goods
The composition scheme is available only for intra-state supplies. Any person who makes inter-State outward supplies of goods cannot avail of the scheme. [Section 10(2)(c)] Note: Inter-State inward supplies (purchases) are allowed; only outward supplies are restricted.

5. Persons Making Supply through Electronic Commerce Operators (ECO)
A person who supplies goods through an electronic commerce operator (such as Amazon, Flipkart) who is required to collect Tax Collected at Source (TCS) under Section 52 of the CGST Act cannot opt for composition. [Section 10(2)(d)] This is because TCS mechanism is incompatible with the flat-rate composition tax.

6. Manufacturers of Notified Goods
Persons engaged in the manufacture of certain notified goods are excluded. The Government has notified the following goods under Section 10(2)(e):
- Ice cream and other edible ice (whether or not containing cocoa)
- Pan masala
- Tobacco and manufactured tobacco substitutes
- Aerated water (as notified)
These goods attract specific tax rates and policy considerations that make them unsuitable for the composition scheme.

7. Additional Restriction — Same PAN Rule
If a person operates multiple business verticals or registrations under the same PAN, all registrations must collectively opt for composition. If any of the registrations is ineligible, the person cannot opt for composition for any of the registrations. [Rule 6 of CGST Rules, 2017]

Important Note: A composition dealer cannot collect tax from recipients and is not entitled to claim Input Tax Credit (ITC). The scheme is available only when the aggregate turnover in the preceding financial year does not exceed ₹1.5 crore (₹75 lakhs for special category states as notified).

In summary, the exclusions aim to keep the scheme limited to small, local, intra-state traders dealing in taxable goods, ensuring administrative simplicity and preventing misuse.

Option 1: Validity of the Statement on GTA Services Exemption

The statement is not completely valid. While it is correct that GTA services provided to unregistered persons are generally exempt, the inclusion of 'unregistered casual taxable person' in the exemption is legally incorrect for the following reasons:

Correct Part of the Statement:
As per Entry 21A of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, services supplied by a Goods Transport Agency (GTA) to an unregistered recipient (other than those falling under the Reverse Charge Mechanism) are exempt from GST. Such unregistered persons include ordinary unregistered individuals or entities not covered under the RCM notification.

Invalid Part of the Statement — 'Unregistered Casual Taxable Person':
The phrase 'unregistered casual taxable person' is itself a legal contradiction under the CGST Act, 2017. As per Section 24 of the CGST Act, 2017, a Casual Taxable Person (CTP) is mandatorily required to obtain registration before commencing any taxable supply, regardless of threshold limits. A CTP cannot legally operate without registration. Therefore, the concept of an 'unregistered CTP' does not exist in law.

Furthermore, even if a CTP is duly registered, GTA services provided to a casual taxable person are specifically covered under Notification No. 13/2017-Central Tax (Rate) (RCM Notification), which lists 'any casual taxable person located in the taxable territory' as a recipient on whom tax is payable on reverse charge basis. Hence, GTA services to a CTP are not exempt but are taxable under RCM.

Conclusion: The statement is partially valid. GTA services to ordinary unregistered persons are exempt under Entry 21A. However, the inclusion of 'unregistered casual taxable person' is invalid because (i) a CTP must compulsorily register under Section 24, and (ii) GTA services to a registered CTP attract GST under reverse charge, not exemption.

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Option 2: Five Activities/Transactions under Schedule III of the CGST Act, 2017 (Neither Supply of Goods nor Supply of Services)

The following five activities/transactions, as specified in Schedule III of the CGST Act, 2017, shall be treated as neither a supply of goods nor a supply of services:

1. Services by an employee to the employer in the course of or in relation to his employment.

2. Services by any Court or Tribunal established under any law for the time being in force.

3. Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.

4. Actionable claims, other than lottery, betting and gambling.

5. Services of funeral, burial, crematorium or mortuary, including transportation of the deceased.

Rule 86A of the CGST Rules, 2017 — Grounds for Blocking Electronic Credit Ledger

Provision Overview: Rule 86A empowers the Commissioner (or an officer authorised by him, not below the rank of Assistant Commissioner) to restrict the use of Input Tax Credit (ITC) available in the Electronic Credit Ledger of a registered person. Such restriction may be imposed where there are reasons to believe that the credit has been fraudulently availed or is ineligible. The reasons must be recorded in writing before invoking this power.

Grounds as Guided by CBIC (Rule 86A(1)):

The reasons for such belief must be based on any of the following grounds:

(a) Credit availed on strength of tax invoices or debit notes or prescribed documents issued by a supplier —
(i) who has been found non-existent or is not conducting any business from the place for which registration has been obtained; or
(ii) without there being any actual receipt of goods or services or both by the registered person.

(b) Credit availed on invoices or debit notes or prescribed documents in respect of a supply where the tax charged has not been paid to the Government by the supplier.

(c) The registered person availing the credit has been found to be non-existent or is not conducting any business from the registered place of business.

(d) The registered person availing credit is not in possession of a tax invoice, debit note, or any other document prescribed under Rule 36 of the CGST Rules, 2017.

Key Procedural Safeguards as per CBIC Guidelines:

- The power under Rule 86A must NOT be exercised mechanically or as a routine measure; it requires tangible material or evidence giving rise to a reasonable belief.
- The restriction is temporary and ceases to have effect after one year from the date of imposition (unless the conditions still exist).
- Once the conditions that led to blocking cease to exist or the person proves the validity of the credit, the blocked amount must be released by the officer.
- The officer must record specific and verifiable reasons in writing — generalised or vague grounds are not sufficient.

Conclusion: Rule 86A is a preventive anti-fraud measure. Credit blocking is valid only when it falls squarely within grounds (a) to (d) above, supported by proper recorded reasons — protecting genuine taxpayers from arbitrary restriction of ITC.

Part (ii): Material Usage Variance, Labour Cost Variance, Labour Efficiency Variance

*Note: The numerical data for Part (ii) and (iii) appears to belong to Part (i) of this question which was not provided. The standard formulas and approach are presented below.*

Material Usage Variance (MUV): MUV = (Standard Quantity for Actual Output − Actual Quantity Used) × Standard Price per unit. A positive result is Favourable (F); negative is Adverse (A). It isolates the quantity efficiency of material consumption from the price effect.

Labour Cost Variance (LCV): LCV = Standard Labour Cost for Actual Output − Actual Labour Cost. It is the total variance in labour and is sub-divided into rate and efficiency components.

Labour Efficiency Variance (LEV): LEV = (Standard Hours for Actual Output − Actual Hours Worked) × Standard Rate per hour. It measures the efficiency of the workforce — fewer hours than standard is Favourable.

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Part (iii): Fixed Overhead Variances

Fixed Overhead Cost Variance (FOCV): FOCV = Absorbed Fixed Overhead − Actual Fixed Overhead Incurred. This is the total fixed overhead variance.

Fixed Overhead Expenditure Variance (FOEV): FOEV = Budgeted Fixed Overhead − Actual Fixed Overhead Incurred. It arises purely due to a difference in actual spending vs. budget, unrelated to output.

Fixed Overhead Volume Variance (FOVV): FOVV = Absorbed Fixed Overhead − Budgeted Fixed Overhead. It arises when actual output differs from budgeted output. FOVV = FOCV − FOEV. The nature (F or A) is determined by sign: positive = Favourable, negative = Adverse.

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Part (b): Under-Recovery, Over-Recovery and Their Effects on Cost Accounting Profit

In Cost Accounting, overheads are absorbed into product costs using predetermined absorption rates based on budgeted figures. The actual overhead incurred (as per Financial Accounting) may differ from overhead absorbed (as per Cost Accounting). This gives rise to under-recovery or over-recovery.

Under-Recovery occurs when the overhead absorbed in Cost Accounts is *less* than the actual overhead incurred in Financial Accounts. In this case, costs charged to production are lower than actual costs, so Cost Accounting profit will be overstated compared to Financial Accounting profit.

From the given data, all three overhead heads show under-recovery:
- Factory Overhead: ₹94,750 (actual) vs. ₹90,000 (absorbed) → Under-recovery of ₹4,750
- Administrative Overhead: ₹60,000 (actual) vs. ₹57,000 (absorbed) → Under-recovery of ₹3,000
- Selling Overhead: ₹53,000 (actual) vs. ₹51,500 (absorbed) → Under-recovery of ₹1,500

Total under-recovery = ₹4,750 + ₹3,000 + ₹1,500 = ₹9,250. This reduces Financial Accounting profit relative to Cost Accounting profit.

Over-Recovery occurs when overhead absorbed exceeds actual overhead. Here, costs charged to production are higher than actual, so Cost Accounting profit will be understated and Financial Accounting profit will be higher.

Effect on Stocks: Cost Accounting carries stocks at a different valuation than Financial Accounting:
- Opening Stock (CA) ₹22,500 > (FA) ₹17,500 → Difference: ₹5,000
- Closing Stock (CA) ₹15,000 > (FA) ₹12,500 → Difference: ₹2,500

Higher opening stock in CA charges more cost to the period (reduces CA profit); higher closing stock in CA carries forward more cost (increases CA profit). These differences, combined with overhead under/over-recovery, explain the gap between Financial Accounting profit and Cost Accounting profit and form the basis of a memorandum reconciliation statement.

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Part (c): How High Employee Turnover Increases the Cost of Production

High employee turnover refers to the rate at which employees leave an organisation and are replaced. It increases the cost of production in the following ways:

1. Recruitment and Selection Costs: Costs of advertising vacancies, conducting interviews, aptitude tests, and medical examinations are incurred each time a new employee is hired. These are direct overheads chargeable to production.

2. Training and Induction Costs: New employees require induction training, on-the-job training, and skill development before they become productive. The time and resources spent constitute an avoidable cost.

3. Loss of Productive Efficiency: Newly recruited workers operate below standard efficiency initially. This leads to adverse Labour Efficiency Variance — more hours are taken than standard, increasing labour cost per unit.

4. Increased Supervision Costs: New or inexperienced workers need greater supervision, increasing indirect labour costs and supervisory overheads.

5. Defects and Spoilage: Inexperienced workers tend to produce more defective output, scrap, and rework. This inflates material costs and overhead costs per good unit produced.

6. Idle Time and Disruption: During the transition period between an employee leaving and a replacement becoming fully productive, there is idle time and production disruption, increasing overhead cost per unit.

7. Separation Costs: Costs of terminal benefits, notice pay, exit interviews, and administrative processing of resignations add to overheads.

In summary, high employee turnover creates both direct cost increases (wages, materials wasted) and indirect cost increases (training, supervision, recruitment), all of which inflate the cost of production and reduce operational efficiency.

Accounting Treatment of Building — SMC Limited

Classification of Buildings:

SMC Limited holds two categories of building interests: (1) Own building with an opening written-down value (WDV) of ₹48,00,000, and (2) A building taken on rent from a third party for ₹12,00,000. Under AS 10 — Property, Plant and Equipment (revised), only assets *owned* by the entity are recognised as PPE and subjected to depreciation. An operating lease creates no asset on the lessee's books; the rental obligation is an expense.

Depreciation on Own Building — Units of Production Method:

The enterprise applies the units of production method as per AS 10. The depreciation rate is fixed at ₹1,50,000 per unit of production. During the period, 60 units were held/produced attributable to the building.

Computed depreciation = 60 units × ₹1,50,000 = ₹90,00,000.

However, AS 10 explicitly states that the depreciable amount of an asset is its cost (or revalued amount) *less its residual value*, and the carrying amount of an asset *cannot be reduced below its recoverable amount*. More critically, accumulated depreciation cannot exceed the depreciable cost. Since the computed depreciation of ₹90,00,000 exceeds the opening WDV of ₹48,00,000, depreciation is restricted to ₹48,00,000 (assuming nil residual value), fully writing off the asset in this period.

If a residual value (say 5% = ₹2,40,000) were stated, the cap would be ₹48,00,000 − ₹2,40,000 = ₹45,60,000. In this question, absent a stated residual value, depreciation = ₹48,00,000.

Treatment of Rented Building:

The rental of ₹12,00,000 paid to the third party is an operating lease expense debited to the Profit and Loss Account. No PPE is recognised; no depreciation arises on it in SMC's books.

Journal Entries:

*Depreciation on own building:*
Dr. Depreciation A/c ₹48,00,000
Cr. Building A/c ₹48,00,000
(Being own building fully depreciated under units of production method, WDV reduced to nil)

*Rental expense for third-party building:*
Dr. Rent/Lease Rental A/c ₹12,00,000
Cr. Bank / Outstanding Expenses A/c ₹12,00,000
(Being rent for building taken from third party charged to P&L)

Summary — Balance Sheet Impact:

Own Building — Opening WDV: ₹48,00,000 | Depreciation charged: ₹48,00,000 | Closing WDV: NIL
Rented Building — Shown as Rent Expense in P&L: ₹12,00,000 | No PPE entry.

Final Answer: Depreciation on own building for the period = ₹48,00,000 (restricted from computed ₹90,00,000 to not exceed WDV). Rental expense of ₹12,00,000 is charged to Profit & Loss Account.

Note on Missing Data: The question states 'Opening balance given' but the specific opening balance figure has not been provided in the query. The solution below is structured on the basis that Dividends = 35% of Net Profit (i.e., the residual after 30% Retained Earnings + 35% General Reserve = 65%), which equals ₹12,60,000. If an opening balance or a different dividend percentage was specified in the original question, the same framework applies with revised figures.

Step 1 — Determination of Total Net Profit

Since Retained Earnings appropriation = 30%, General Reserve = 35%, and the balance 35% represents Dividends = ₹12,60,000:

Total Net Profit = ₹12,60,000 ÷ 35% = ₹36,00,000

Step 2 — Profit Allocation

Transfer to General Reserve (35%): 35% × ₹36,00,000 = ₹12,60,000

Transfer to Retained Earnings / P&L Balance c/f (30%): 30% × ₹36,00,000 = ₹10,80,000

Dividends declared (35%): ₹12,60,000 (given, confirmed)

Total = ₹12,60,000 + ₹10,80,000 + ₹12,60,000 = ₹36,00,000 ✓

Step 3 — Profit & Loss Appropriation Account of ZIA Limited

Dr. side: Transfer to General Reserve ₹12,60,000 | Dividend ₹12,60,000 | Balance c/f (Retained Earnings) ₹10,80,000 + Opening Balance b/f (if any) | Total ₹36,00,000 (plus opening balance)

Cr. side: Balance b/f (Opening P&L) + Net Profit for the year ₹36,00,000

Step 4 — Key Accounting Treatment

As per Schedule III of the Companies Act, 2013, transfer to General Reserve reduces the distributable profits. Dividends declared are recognised as a liability only upon declaration by the Board / shareholders. AS 4 (Contingencies and Events Occurring After the Balance Sheet Date) requires that dividends declared after the balance sheet date are disclosed but not provided as a liability in the current year unless declared before year-end.

The General Reserve is a free reserve under Section 2(43) of the Companies Act, 2013, and may be utilised for bonus issue, buy-back, or other statutory purposes.

Final Answer:
- Net Profit: ₹36,00,000
- Transfer to General Reserve: ₹12,60,000
- Dividend Distributed: ₹12,60,000
- Retained in P&L (carried forward): ₹10,80,000 (plus any opening balance)