QUESTION
Stable and Efficient Limited is an industrial undertaking situated in the urban area of State Haryana of India. The company is a registered person under CGST Act and is into manufacturing business of various types of carry bags and storage bags. During the financial year 2021-22, the manufacturing business of the said industrial undertaking was shifted from urban area of State Haryana to rural area of State Haryana. Land of the company was sold for Rs. 2.25 crore on 04.07.2021 because of the shifting.
The said land was purchased on 13.11.2020 for Rs. 1.75 crore. The new land was purchased (not an agriculture land) for Rs. 1.30 crore on 07.11.2021, for the purpose of manufacturing business of various types of carry bags and storage bags in the rural area of State Haryana of India. Stable and Efficient Limited is an unlisted public limited company, having a paid-up share capital of Rs. 56crores during the financial year 2021-22.
An individual Chartered Accountant named Mr.X, or a Partnership Firm of Chartered Accountants named YZ, and Associates was to be appointed as auditor of the company. During the financial year 2021-22, the management of Stable and Efficient Limited was planning regarding acquiring the business of one of its competitors by the name of Competent and Capable Limited.
Before acquiring the business of Competent and Capable Limited, the management of Stable and Efficient Limited thought of undertaking the process of Due Diligence for the purpose of evaluating whether the acquisition of business of Competent and Capable Limited would be beneficial or not.
Three types of due diligence were undertaken, the information regarding which is provided as follows:
(1) A Due Diligence was performed in order to analyze the financial information and account books of Competent and Capable Limited.
(2) In order to understand what would be the advantage or disadvantage from the point of view of tax after the business of Competent and Capable Limited is acquired, another Due Diligence was performed.
(3) A third type of Due Diligence was performed to understand the complete working environment of Competent and Capable Limited.
Certain transactions of Stable and Efficient Limited happened during the financial year 2021-22, the information of which is provided as below:
(1) An amount of Rs. 15,300 was received in form of cash from one of the trade receivables of the company.
(2) The equipment named Equipment 22 was purchased for an amount of Rs. 14,600 which was paid in cash.
(3) A trade payable of Rs. 13,700 was not paid in form of cash, rather the equipment named Equipment 94 was given to settle the whole amount.
(4) An amount of Rs. 2,72,000 was received for equity shares issued, during the beginning of financial year 2021-22 by the company. Mr. T one of the directors of the company was of the opinion that the company was required to develop and maintain production records and accounts on half yearly basis. Another director of the company, named Mr. N, was of the opinion that the company was not required to develop and maintain production records and accounts showing quantitative details of various types of carry bags and storage bags manufactured and also quantitative details of raw materials used in the manufacturing of the carry bags and storage bags.
FROM ABOVE ANSWERS BELOW MENTIONED QUESTIONS
1. In the financial year 2021-22, there was a shifting of industrial undertaking of Stable and Efficient Limited from urban area of State Haryana to rural area of State Haryana of India. In this regard answer the questions that follow:
(a) In respect of Land sold on 04.07.2021, what is the amount of exemption available to Stable and Efficient Limited for the A.Y. 2022-23?
(b) Consider that stamp duty paid with respect to purchase of the land was Rs. 11,50,000. In this situation, what is the amount of exemption available to Stable and Efficient Limited for Land sold on 04.07.2020 for the A.Y. 2022-23?
(c) If during the financial year 2022-23, new Land purchased on 07.11.2021 is sold then in that situation what would happen?
2. With respect to applicability of Rotation of Auditor, answer the questions that follow:
(a) Assume that Mr. X, an individual Chartered Accountant, is appointed as an auditor of Stable and Efficient Limited. After completion of term as an auditor as mentioned in Rotation of Auditor, for how many years Mr. X cannot be reappointed as an auditor of the said company?
(b) Suppose YZ and Associates, a Partnership Firm of Chartered Accountants is appointed as an auditor of Stable and Efficient Limited, after completion of that term as an auditor as is mentioned for Rotation of Auditor, for how many years YZ and Associates cannot be re-appointed as an auditor of the company that is mentioned above?
3. Explain in words what the below mentioned transactions represent in relation to Cash Flow Statement of Stable and Efficient Limited for the financial year ended on 31.03.2022:
(a) When amount of Rs. 15,300 was received in cash from a trade receivable. (b) When payment of Rs. 14,600 was made in cash for purchase of Equipment 22.
(c) When Equipment 94 was given to settle the whole amount of Rs. 13,700 of a trade payable.
(d) When equity shares were issued and an amount of Rs. 2,72,000 was received.
4. Identify whether the opinions formed by Mr. T and Mr. N w.r.t. maintenance of production records and accounts are correct or incorrect in the context of CGST Rules. Also give reason in order to explain your answer.
ANSWERS TO THE QUESTIONS
ANSWERS 1 (a)
According to Section 54G of the Income Tax Act, 1961 in respect of Land sold on 04.07.2021, the amount of exemption available to Stable and Efficient Limited for the A.Y. 2022-23 will be as follows:
Particulars Amount(Rs.)
Net Sale Consideration of land 2,25,00,000
Less: Cost of acquisition of land (1,75,00,000)
Short-Term Capital Gain 50,00,000
Note: Cost of new land purchased by Stable and Efficient Limited Rs. 1,30,00,000. As the cost of new land is more than Short Term Capital Gain, therefore whole amount of the short-term capital gain of Rs. 50,00,000 is exempt.
(b) Cost of new land, which was purchased by Stable and Efficient Limited Rs. 1,30,00,000. Stamp duty paid with respect to purchase of land Rs. 11,50,000. Total of cost of new land and stamp duty paid= 1,30,00,000 + 11,50,000 = Rs. 1,41,50,000. As per Section 54G of the Income Tax Act, 1961 as the cost of new land and expenses incurred is equal to Rs. 1,41,50,000 which is more than Short Term Capital Gain of Rs. 50,00,000, therefore complete amount of Short-Term Capital Gain of Rs. 50,00,000 is exempt.
(c) If the new land purchased on 07.11.2021 is sold during the financial year 2022-23 then according to Section 54G of the Income Tax Act, 1961 the Short-Term Capital Gain of Rs. 50,00,000 which was earlier exempted would be reduced from cost of purchase of new land of Rs. 1,30,00,000 for the purpose of calculating the capital gain in respect of new land of Stable and Efficient Limited sold during the financial year 2022-23.
ANSWERS TO QUESTION 2
According to Section 139(2) of the Companies Act, 2013 relating to the concept of Rotation of Auditor, the answers to the questions are provided as follows:
(a) If Mr. X, an individual Chartered Accountant, is appointed as an auditor of Stable and Efficient Limited, then after completion of term as an auditor of the company as is mentioned in Rotation of Auditor, Mr. X cannot be re-appointed as an auditor of Stable and Efficient Limited for 5 years from the completion of term as an auditor of the company.
(b) If YZ and Associates, a Partnership Firm of Chartered Accountants, is appointed as an auditor of Stable and Efficient Limited, then after completion of term as an auditor as is mentioned in Rotation of Auditor, YZ and Associates cannot be re-appointed as an auditor of Stable and Efficient Limited for 5 years from the completion of term as an auditor of the company
ANSWER TO THE QUESTION 3
According to the Cash Flow Statement of Stable and Efficient Limited for the financial year ended on 31.03.2022, the transactions mentioned above represent as follows:
(a) This represents Cash Inflow of Rs. 15,300 from operating activities because according to Indian Accounting Standard 7 relating to Statement of Cash Flows, an amount received from a trade receivable represents inflow of cash from operating activities.
(b) This represents cash outflow of Rs. 14,600 from investing activities because according to Indian Accounting Standard 7 relating to Statement of Cash Flows, an amount paid for purchase of an equipment represents outflow of cash from investing activities.
(c) According to Indian Accounting Standard 7 relating to Statement of Cash Flows, this represents non-cash transaction and hence it will not be included in Cash Flow Statement of Stable and Efficient Limited for the financial year ended on 31.03.2022 because equipment was given to settle the whole amount of Rs. 13,700 of a trade payable and no cash is involved in this transaction.
(d) This represents Cash Inflow of Rs. 2,72,000 from financing activities because according to Indian Accounting Standard 7 relating to Statement of Cash Flows, an amount received for issue of equity shares represents inflow of cash from financing activities.
ANSWER TO QUESTION 4
The opinion of Mr. T is incorrect because according to Rule 56(12) of Section 35 and Section 36 read with Chapter VII relating to Accounts and Records of CGST Rules, 2017, each and every registered person who is involved in the manufacturing of goods is required to develop and maintain production records and accounts on monthly basis. Similarly, Stable and Efficient Limited is a registered person, which is involved in the manufacturing of various types of carry bags and storage bags is required to develop and maintain production records and accounts on monthly basis.
(b) The opinion of Mr. N is incorrect because according to Rule 56(12) of Section 35 and Section 36 read with Chapter VII relating to Accounts and Records of CGST Rules, 2017, each and every registered person involved in manufacturing of goods is required to develop and maintain production records and accounts on monthly basis showing quantitative details of goods manufactured and quantitative details of raw materials used in the manufacturing of goods. Similarly, Stable and Efficient Limited is a registered person, who is involved in manufacturing business of various types of carry bags and storage bags is required to develop and maintain production records and accounts on monthly basis showing quantitative details of various types of carry bags and storage bags manufactured and quantitative details of raw materials used in the manufacturing of those carry bags and storage bags.
Sub-section 1 of Section 35 stipulates that every registered person shall keep and maintain, at his principal place of business, true and correct account of- (a) Production or manufacture of goods
(b) Inward and outward supply of goods or services or both
(c) Stock of goods
(d) Input tax credit availed
(e) Output tax payable and paid
(f) Such other particulars as may be prescribed.
Production or manufacturing of goods: The word production and manufacturing are synonymous to each other. Section 2(72) has defined the term manufacture means the processing of raw material or inputs in any manner that results in the emergence of a new product having a distinct name, or character.
Manufacturers have to maintain a true and correct account of their production or manufacturing records. The records should be in quantitative as well as value-based as the section has not specified that only quantitative records will be maintained.
All registered persons engaged in the manufacturing of goods have to maintain quantitative as well as value-based manufacturing records.
However, rule 56(12) has specified that every registered person manufacturing the goods has to maintain monthly quantitative records of raw materials or services used in the manufacturing of goods and quantitative details of goods so manufactured including the waste and by-products thereof.
We may say based on section 35(1) read with rule 56(12) that every registered person engaged in the manufacturing of goods has to maintain on monthly basis the quantitative records of raw materials or services used in manufacturing and also records of goods so manufactured including the waste and scrap thereof.
These records are not limited only to quantitative but extend to value base also. How the value of goods so manufactured is to be determined is not defined in the act. The principles of determination of value of goods manufactured are governed by GACAP and CAS as issued by the Institute of Cost Accountants of India
DISCLAIMER: The case law presented here is only for sharing information with readers. In case of necessity do consult with professionals.
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