Mock Exam

Mock exam

2 CA Sri Lanka
 Mock exam

PART B – BUSINESS LAW

SECTION 1
All questions are compulsory.
Total marks for Section 1 is 50 marks.
Recommended time for the section is 90 minutes.

1 Wood Tiles
John is as an employee of Wood Tiles (Pvt) Ltd., a company involved in manufacture
and sale of specialised wood work. John’s contract of employment contains a clause
that John is not entitled to do business with Wood Tile’s customers if John ever left
the employment of the company.
After serving as a faithful employee for two years, John gave notice that he wishes
to leave the company and left his employment on good terms. A few months later
the owners of Wood Tiles realised that a number of the company’s clients whom
John had served were moving away from Wood Tiles (Pvt) Ltd and obtaining the
services from Timber Tiles (Pvt) Ltd., a recently incorporated company. Upon
investigation it was revealed that Timber Tiles (Pvt) Ltd had been incorporated by
John. John claims that he is not doing business with Wood Tile’s customers
personally since these customers are doing business with the incorporated body,
Timber Tiles (Pvt) Ltd. Furthermore John claims that due to the veil of
incorporation no action can be taken against him personally.
Required
Explain to the owners of Wood Tiles (Pvt) Ltd. if John’s position is correct in the
eyes of the law. (10 marks)
(LO 1.3.1, 1.3.2, 1.3.3, 1.3.4)

2 From Prince to King

Harvey has been running a business as a sole proprietorship for a number of years
bearing the name “Prince”. The sole proprietorship has been involved in the
business of construction. Given the success of the business thus far, Harvey is
seeking to expand and incorporate the business under the name “King”.
Harvey’s needs are simple. He requires the new business to be ready to expand
“without any limits”, and requires a model that will gain him large volumes of
capital at the lowest possible cost. Harvey however seeks to maintain and control
of the business at least for the initial period until the business is established. Harvey
seeks your advice with regard to the business model that will best suit his needs.
Required

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(a) Explain to Harvey the types of companies that can be incorporated

under the company law of Sri Lanka. (4 marks)
(b) Recognise the type of company that will be best suited for his purposes.
(6 marks)
(Total = 10 marks)
(LO 2.1.1)

3 DEF (Pvt) Ltd.

You are the Company Secretary of DEF, a Private Limited Liability Company which
is engaged in the business of sales and distribution of metal works. The registered
address of the company is situated at No. 143, School Lane, Colombo 05.
You have been notified that the Annual General Meeting of DEF is to be held on
Thursday 31st of July 2015 at the office premises of DEF. You have been requested
to prepare a notice to be sent to the shareholders notifying the shareholders of the
Annual General Meeting. At the meeting resolutions will have to be passed for the
Audited Accounts for the year ending 31st March 2015 to be adopted, the
reappointment of the Company Auditors, Fernando Associates Chartered
Accountants, for the declaration of a dividend in the sum of Rs. 5,000/- per share
and for the re-election of a director (Mr. Susantha Chameera) retiring by rotation.

Required
(a) Prepare the AGM notice for DEF (Pvt) Ltd. making note of the
aforementioned requirements. (5 marks)
(b)Prepare the minutes of the AGM for DEF (Pvt) Ltd. making note of the
resolutions that are to be passed therein.
(5 marks)
(Total = 10 marks)
(LO 5.1.2, 5.2.2)

4 Time is up
Persian Textiles (Pvt) Ltd. is a small business enterprise that imported foreign
textiles for the sale and distribution within Sri Lanka. Given the lull in the
international market during the preceding year, the company is not experiencing
major financial difficulties.
Mr. Abdul Lafeek has been in business with Persian Textiles for a number of years
and has supported the company through previous financial difficulties that it has
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suffered. However in the present standpoint, Mr. Lafeek has concluded that the
company will not be able to function much further. At present a sum of Rs. 1 million
is owed from the company to Mr. Lafeek and Mr. Lafeek believes that the only way
in which his funds can be recovered, if the company is wound up and the company’s
assets used to recover the liabilities.

Required
a) Explain the methods which can be utilised to wind up a company.
(4 marks)
b) Outline the best method available to Mr. Lafeek in order to wind up the
company.
(6 marks)
(Total = 10 marks)
(LO 6.1.1)

5 Inside information
The latest news report indicates that an investigation is being conducted with
regard to the securities market and specifically with regard to the shares pertaining
to a company bearing the name Martin and Sons PLC. It has transpired that major
profits have been recorded by certain investors who have a close relationship to Mr.
Richard Martin, the Managing Director of the said company.
It is apparently suspected that Mr. Martin has provided important information to
strategic persons regarding a recent development in the company which caused the
share value of the said company to dramatically increase. It is rumoured that this
information was provided before such information was provided to the public.

Required
Explain whether in the event that the aforementioned reports are correct and Mr.
Martin be found guilty of an offence.
(10 marks)
(LO 7.1.4)

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PART A – BUSINESS TAXATION

SECTION 2
All questions are compulsory.
Total marks for Section 1 is 50 marks.
Recommended time for the section is 90 minutes.

1 Minuki Trading PLC

Minuki Trading PLC is a quoted public company incorporated in the year of
assessment 2010/11. The company is engaged in manufacturing PVC shoes.

You are given the following information for the year of assessment 2014/15 as
follows,

Statement of comprehensive Income

(Rs. 000)

Revenue 700,000
Cost Of sales (420,000)
Gross Profit 280,000

Other Income
- Dividend (Net) 550
- Interest on treasury bills (Net) 675
- Profit on sale of fixed Assets 800
- Rent Income 600
- Profit on sale of shares 258 2,883
282,883
Expenses
- Distribution Cost 21,585
- Administrative cost 152,917
- Other Cost 250
- Finance cost 890 (175,642)

Profit Before tax 107,241

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1. You are informed that, the details of the property plant and equipment are
as follows:

Details of Property Value Year of purchase

Land 25,000,000 2009/10
Buildings 22,000,000 2012/13
Furniture 8,000,000 2012/13
Motor vehicle 12,525,000 2011/12
Plant and machineries 30,000,000 -

In addition to the above information following details are also provided,

a. The land was purchased in year 2009/10 for a value of Rs. 22,000,000 and
in 2010/11 company incurred Rs. 3,000,000 on Fences, Culverts, drains,
walls etc… and capitalized to the land costs.

b. Company is having two buildings for two factories at Kalutara and Kandy.
The value of Kalutara building was Rs. 12mn. and Kandy building was Rs. 10
mn. Kalutara building were constructed on 2001/02 and purchased by the
company on year 2012/13. Kandy building had constructed by the company
for using for the business. But 1/4th of the building had given on rent for a
main customer and he is paying Rs. 50,000 per month as rent.

c. 31st December 2014 Company had purchased Rs. 3.5 Million worth new
furniture and mistakenly it had not taken for the ledger therefore had not
depreciated during the year. This furniture had purchased by selling some
old furniture. Total cost of the sold furniture was Rs. 2.8 Million and sales
proceed was Rs. 3.2Million.

d. Company is depreciating their all assets 10% on cost value. Depreciation

charged to the income statement for the year is Rs. 28 Million.

e. Motor vehicles include

- Rs. 2.5 Million Car use for travelling purpose

- Rs. 3 Million worth car use for office travelling
- Rs. 5 Million worth motor coach use for travelling
- Rs. 2,025,000 motor cycles given for non-executive Officers

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f. Plant and machinery includes Rs. 5 Million Cost machineries which were
purchased on hire purchase agreement on 2012/13. Monthly rental value is
Rs. 500,000. In addition to this Rs. 2,000,000 worth air condition machine
was given by the company for one of his manager’s house. This machine had
purchased on 2013/14. Plant and machinery costs include Rs. 6.5 Million
worth new machineries purchased during the year. Company had incurred
Rs. 300,000 as cost of overseas trip for inspection and Rs. 500,000
improvements on these machineries and had capitalized. All other
machineries had purchased from the incorporation of the company.
2. Extract of the Notes to the accounts represent following expenses

Distribution Costs

Advertising cots 5,500,000

Provision for bad Debt 1,100,000
Travelling expenses 5,700,000

Administration Cost

Salaries 98,000,000
Contribution to provident fund 16,000,000
Contribution to pension fund 18,000,000
Contribution to gratuity fund 17,000,000
Electricity 1,200,000
Entertainment 627,000
Repair Expenses – on rented building part 320,000
Donations 1,750,000
Legal Fees – recovery of loan 1,220,000

3. Advertising costs includes Rs. 2.5 mn salaries and wages paid to members of
the advertising staff, Rs. 500,000 for staff vacancy advertisement and Rs. 1.5
mn on advertising outside Sri Lanka.

4. Provision for bad debt includes specific provision of Rs. 580,000 and General
provision of Rs. 820,000 at the year end. Further recovered Rs. 300,000 from
a written off customer last year and this was allowed for tax purpose in the
same year.

5. Travelling expense includes Rs. 540,000 in respect of motor vehicle used for
the business, Rs. 85,000 on travelling from residence to office by office staffs
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and Rs. 75,000 from office to bank. In addition to these, total foreign
travelling includes Rs. 5 Million. Out of this Rs. 2.5Million incurred on
promotion of the company products in foreign countries and 800,000 for
cost of passage of person brought for consultation for shoe manufacturing
process at Kalutara factory. Last year company taxable profit was Rs. 80 mn

6. All the funds to which the contributions have been made on behalf of
employees have been approved by the Commissioner General, subject to the
limits imposed by them.

7. Other expenses include Ground rent of Rs. 175,000 and on this 150,000 had
paid in cash.

8. Donation represent, donations made to the government includes the cost of

dry rations given to flood affected people in Polonnaruwa, amounting to
Rs.350,000/-. No receipt has been received in respect of the donations of the
dry rations. Other government donations represent Rs. 750,000 in cash and
balance with the shoes given to provincial council.

9. Company has distributed dividends amounting to Rs.1,800,000/- during the

above year of assessment

10. Self-assessment payments made during the year amounts to Rs.7, 500,000/-

Required

A Compute Statutory Income, Assessable Income, Taxable Income, Net

Income Tax Liability for the Y/A 2014/15.
(21 marks)

B Compute the minimum dividend to be distributed by Company before

30 September 2015 in order to avoid the deemed dividend tax for the
Y/A 2015/16. (4 Marks)

(Total =25 Marks)

(LO 1.2.1, 1.2.2, 1.2.3, 1.2.4, 1.3.1, 1.3.2, 2.1.2, 2.2.1, 2.2.2)

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2 House for blind

A) Angulana – house for blind had been incorporated under the companies act as a
company limited by guarantee for the purpose of conducting a day school and other
welfare activities for the children with inspired sight.

The income and expenditure account for the year ended 31st march 2015 is as
follows:

Income
School and hostel fees (Nominal) 100,000
Donation and subscription 500,000
Rent 1,200,000
Interest on fixed deposits (Net) 300,000
Interest on savings accounts (Gross) 50,000
Hiring income from auditorium 150,000
Annual exhibition income 180,000
Sales – Handicraft 150,000
Government grant 150,000
2,780,000
Expenses
Salaries and wages 800,000
Building maintenance 190,000
Raw material for handicraft 50,000
Depreciation 100,000
Administration Expenses 500,000
Annual exhibition expenses 600,000
Education and welfare 260,000
2,500,000

Surplus for the year 280,000

Notes
I. Profits and income from all the activities are re applied for the purpose of
the institution
II. A building belongs to the institution has been given on rent at Rs. 100,000
Per month and the rates and repair expenses for the year Rs. 30,000 and Rs.
70,000 respectively has been charged to the building maintenance account.
III. Handicrafts are manufactured by the inmates of the school in a workshop
and regular employees awe occupying to sell them at a monthly salary of Rs.
6,000, this is also included in salaries and wages.
IV. Depreciation has been charges on new furniture (Market value RS.
120,000).other assets are fully depreciated for tax purpose.

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Required

Calculate the tax liability of the company for the year of assessment 2014/15.
(13 marks)

B)The income and expenditure account of the association of small and medium scale
industrialists of Sri Lanka for the year ended 31st march 2015 is as follows.
Income
Membership income
Entrance fees 150,000
Subscription 5,567,500
Other income
Rent (gross) 1,200,000
Hall hire 200,000
Seminars 400,000
Interest on FD 500,000
7,817,500

Expenditure
Salaries 2,500,000
EPF 405,000
Staff training 75,000
Provision for gratuity 200,000
Building maintenance 350,000
Maintenance of office equipment 144,500
Insurance 400,000
Advertising 100,000
Rates 320,000
Depreciation 200,000
Entertainment 50,000
Vehicle maintenance 450,000
Excess of income over expenditure 2,623,000
7,817,500

Notes
I. Building maintenance includes of RS: 200,000 spent on repairs to the part
of the building let at a monthly rent of RS: 100,000
II. Rates include RS: 100,000 being rates paid in respect of premises let.
III. The total of entrance fees and subscription has been received from
members who can claim a deduction in respect of them under sec.25 of the
IR act.

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IV. Staff training and welfare includes a sum of RS: 50,000 paid for a computer
course followed by two employees.
V. Depreciation is in respect of fixed assets which were fully depreciated for
tax purposes.

Required

Compute the tax liability (12 Marks)

(Total= 25 Marks)

(LO 3.2.2, 3.2.3)

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PART B – BUSINESS LAW

SECTION 1

1 Wood Tiles
Under the Sri Lankan company law, a company is possessed with the characteristic
of the company bearing a separate legal personality from that of its owners. In other
words, a company is considered to possess a separate existence and be capable of
suing and being sued under its own corporate name.
A related feature of a separate legal personality is the “veil of incorporation”. The
veil of incorporation is a legal concept that separates the personality of a company
from the personalities of its shareholders, and protects them from being personally
liable for the company's debts and other obligations. The landmark judgment of
Salomon v. Salomon Co. Ltd. recognises this legal principle where it was held that
the legal personality of a company is a veil or mask which covers the identity of its
shareholders.
In the aforementioned case Mr Salomon, converted his business in to a limited
liability company. He formed a company in which he himself, his wife and his
children were shareholders. He took out debentures in his own name. About a year
later the company became insolvent. The assets of the company were just sufficient
to pay the debentures and nothing was left to pay the unsecured creditors. The
creditors sued against Salomon to recover their amounts but it was held by court
that the company was a separate legal person distinct from Salomon as the
company had been validly formed, there was no fraud on the creditors. The
unsecured creditors got nothing. Therefore it is evident that the corporate veil acts
as a shield to prevent the owners of the company from being vested with any
liability in this regard.
However it must be noted that in some compelling situations, the courts lift the veil
of incorporation in order to hold that the owners of the company are liable for the
acts of the company. Where a fraudulent and dishonest use is made of the legal
entity, the individuals concerned will not be allowed to take shelter behind the
corporate personality. In such instances, the Court will disregard the corporate
personality and look behind the real persons who are in the control of the company.
In the present circumstances the question will therefore be asked as the purpose
for which the company Timber Tiles (Pvt) Ltd was incorporated. It has already been
revealed that John is under an obligation to refrain from having any business
dealings with the clients of his former company Wood Tiles (Pvt) Ltd. This is a
contractual obligation to which John is bound. With regard to these surrounding

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facts, the nature of the incorporation of Timber Tiles is made clear. Namely, merely
a few months subsequent to John leaving the employment of Wood Tiles, the new
company “Timber Tiles” (notably bearing a similar name to the company of his
previous employment as well) is incorporated and John’s clients from his previous
work place start doing business with the new business of which John is evidently
playing a pivotal role.
In these circumstances it is safe to conclude that the sole reason for the
incorporation of the company Timber Tiles is for the purpose of defeating the
contractual obligations owed by John to Wood Tiles. John is essentially using the
separate legal personality and the veil of incorporation of Timber Tiles for the
purpose of defeating the operation of the law. In such circumstances it can be
assumed that a strong possibility exists that a court will raise the veil of
incorporation in order to allow the legal obligations owed by John to be enforced.
Wood Tiles (Pvt) Ltd. can be advised to achieve a strong possibility of success. Can
be expected and should legal action be taken against the John and Timber Tiles (Pvt)
Ltd.

2 From Prince to King

a)
Section 3 of the Companies Act categorizes companies in to three types, namely
limited companies, unlimited companies and companies limited by guarantee.
Among these, limited companies are the most common type and it is further divided
in to Private Limited and Public Limited companies.
 Limited company is a business that is owned by its shareholders, run by
directors and most importantly whose liability is limited to the unpaid shares
owned by that shareholder. Creditors who have a claim against the company can
only recover money from the existing assets of the business and cannot recover
any money from the shareholders personal assets. This type of company is
further divided into Private Limited Companies and Public Limited Companies.
o Public Limited Companies – limited liability companies which are listed in
the Stock Exchange are known as Public Limited Companies. Shares of a
Public Limited Company can be purchased by any member of the general
public. Public Limited Companies are heavily regulated and carefully
scrutinized and monitored by the Securities & Exchange Commission and
Colombo Stock Exchange. As a result Public Limited Companies are not
considered to be ideal for start-up businesses.
o Private Limited Companies – companies which have a limited number of
shareholders which are closely held by members of a family or group are

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known as Private Limited Companies. The fundamental rule in a Private

Company is that its shares should not be offered to the public and its
shareholders should be limited to a maximum of fifty shareholders. Private
Limited Companies are generally used as start-up companies which hope to
evolve into Public Limited Companies at a later date by calling for
investment from the general public.
 Unlimited companies – unlimited companies are companies where
shareholders are unlimitedly liable to contribute to the company, in other
words, in case of the company failing to pay its debts, the shareholders’ personal
assets may be used to satisfy the company’s debts.
 Companies limited by guarantee – companies which do not issue shares but the
members are bound by the Articles of the company to contribute in an amount
specified therein if the company is liquidated. These companies are suitable for
charities and non-profit organizations.

b)
Harvey has already been running a successful business for a number of years.
Therefore it can be assumed that the business is already vested with a significant
amount of capital. Having this consideration in mind let us focus our attention to
Harvey’s needs, namely, a business that can expand without limitation; and a
business that can accumulate large capital at low cost.
Given the needs of Harvey, it is quite obvious that it is a Public Limited Company
that will suit Harvey’s needs. A Public Limited Company can possess an unlimited
number of shareholders which would amount to limitless expansion. Furthermore,
given the fact that the shares of a PLC can be issued for trade on the Colombo Stock
Exchange facilitates the accumulation of large quantities of capital at minimum cost.
Therefore it would on the face of it appear that the most suitable business model
for Harvey’s purposes is a PLC.
However it must be noted that PLCs are not considered to be the most suitable
business models to start-up companies. This is largely due to the fact that PLCs are
complicated to establish in being subject to much regulation. In this regard the fact
that the business has already been established and possibly vested with capital
might mean that the business is capable of taking a large leap from being a sole
proprietorship into a PLC. However, since Harvey seeks to retain control of the
business at the inception of incorporation, Harvey may be advised that as a
preliminary step, the business can be established as a Private Limited Company
until such time as it is well established and ready to expand into a PLC. This will
allow Harvey to retain additional control by limited the number of shareholders to
begin with and suit this additional need to Harvey as well.

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3 DEF (Pvt) Ltd.

a)
(i) Notice of Meeting

NOTICE IS HEREBY GIVEN that the Annual General Meeting of DEF (Pvt.) Ltd.
will be held on Thursday the 31st of July 2015 at 4.30 p.m. at the registered Office
of DEF (Pvt) Ltd., No. 143, School Lane, Colombo 05

Article II. AGENDA

1. Notice of Meeting.

2. To adopt Audited Accounts for the Financial Year ended 31st March 2015
together with the reports attached thereto.

3. To re-appoint Auditors.

2. To re-elect Directors retiring by rotation.

3. To declare dividends to shareholders.

By order of the Board

Secretaries
Colombo
1st June 2015

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b)
(i) DEF (Pvt) Ltd.

Minutes of the Annual General Meeting of DEF (Pvt) Ltd. held on Thursday the
31st of July 2015 at 4.30p.m. at the registered Office of DEF (Pvt) Ltd., No. 143,
School Lane, Colombo 05.

Present : Mr. D (Chairman), Mrs. E, Mr. F, Mr. Susantha Chameera

In attendance: Ms. X (Representing - Company Secretary)

Minute No. 1 – Notice of Meeting

The Notice of meeting was taken as read.

Minute No. 2 – Audited Accounts for the Financial Year ended 31st March
2015 together with the reports attached thereto

The Audited Financial Statements for the year ended 31st March 2015 together
with Reports were tabled and adopted on the proposal of Mr. F seconded by Mrs.
E.

Minute No. 3 – Re-appointment of Auditors.

Proposed by Mr. D and seconded by Mrs. E, Messrs. Fernando Associates –

Chartered Accountants were re-appointed auditors to hold office until the next
Annual General Meeting.

Minute No. 4 – Re-election of Directors retiring by rotation

On the proposal of Mr. D, seconded by Mr. F, Mr. Susantha Chameera was re-
elected as Director.

Minute No. 5 – Declaration of Dividend

Proposed by the Mrs. E and seconded by Mr. D a First and Final Dividend of Rs.
5,000/- per share was declared.

There being no other business the meeting was terminated.

CONFIRMED AS CORRECT

CHAIRMAN

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4 Time is up
a)
The winding up of a company can be either:
i) A winding up by court;
ii) A voluntary winding up; or a
iii) A winding up subject to the supervision of court.
The relevant procedure to be adopted sets out whether the winding up a company
can be commenced voluntarily by the stakeholders of the company, or as to whether
the winding up is imposed compulsorily by the law.
i) Winding up by court
The Companies Act provided that a company may be wound up by court if:
 The company has by special resolution resolved that the company be
wound up by the court;
 The company does not commence its business within a year from its
incorporation, or suspends its business for one year;
 If the number of the members falls below the minimum number required
under the Act;
 The company has no directors;
 The company is unable to pay its debts; or
 The court is of the opinion that it is just and equitable that the company
should be wound up.
If the grounds as set out under any of the aforementioned heads are found to be
present within a company, it shall be compulsory for the said company to be
wound up.
ii) Voluntary winding up
This type of winding up can be either a shareholders’ voluntary winding up
(where the company is solvent and able to pay its debts) or a creditor’s
voluntary winding up (where the company is, or will be, insolvent and unable to
pay its debts in full).

The Companies Act provides that a company may be wound up voluntarily :

 when the period fixed for the duration of the company expires or on the
occurrence of the event upon which the company is to be dissolved, and the
company at a general meeting has passed an ordinary resolution requiring
the company to be wound up voluntarily;
 where the company resolves by special resolution that the company be
wound up voluntarily;
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 where the company resolves by special resolution to the effect that it cannot
by reason of its liabilities continue its business and that it is advisable to
wind up.

iii) Winding up subject to the supervision of court

When a company has passed a resolution for voluntary winding up, a petition
may be made to court for an order that the winding up be continued as a
voluntary winding up, but subject to the supervision of court.

b)
Given the circumstances that the company is unable to pay its debts, it would seem
prudent that the winding up of the company be compulsorily conducted. Mr. Lafeek
is a creditor of the company and therefore is vested with the right to demand that
the company make payment of the monies owed to him. In the event that the
company fails in its duty to make payment of the said debt and such debt is
undisputed, then Mr. Lafeek as a creditor will be entitled to institute liquidation
proceedings against the company.
In these circumstances it would appear that Mr. Lafeek will be entitled to make an
application for the winding up of the company either through a winding up by court,
or through a creditor’s voluntary winding up.

5 Inside information
The offence pertaining to the trading of shares and/or causing others to trade in
shares based on information that is not available to the public and instead only
available to those within the inner workings of a company is known as “Insider
Trading”. Insider trading revolves around the ability that a trader gains to obtain
considerable short term profit by trading on shares prior to the release of
information to the public. Therefore an unfair advantage is provided to such traders
at the expense of other traders who are not privy to such information.
If the reports are correct it would appear that Mr. Martin has caused information
that was not available on the public forum to be provided to strategic persons for
the purpose of obtaining a short term profit from the development that has taken
place in the company. This conduct therefore on the face of the surrounding facts
does appear to qualify under the prohibited action of insider trading.
The provisions contained in section 32 of the Securities and Exchange Commission
Act expressly sets out that an individual who is, or at any time during the preceding
six months has been knowingly connected with a company, shall not trade in listed

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securities of that company if he has information which:

a) he holds by virtue of being connected with the company;
b) it would be reasonable to expect a person so connected and in the position by
virtue of which he is so connected, not to disclose except for the proper
performance of the functions attaching to that position; and
c) he can reasonably be expected to know whether unpublished price sensitive
information in relation to those securities.
In this regard therefore it can be concluded that Mr. Martin falls within the
applicability of this section and in particular, the conduct of Mr. Martin appears also
be as provided for in section 32.
It is particularly noted that the usage of information has to be at a moment prior to
such information entering the public domain. Subsequent to the information
entering the public domain, trading on such information does not amount to the
offence of insider trading. In the present circumstances it appears that Mr. Martin’s
conduct falls within the time frame prohibited by the law.
Mr. Martin may attempt to disclaim liability by claiming that he is not the person
involved in the trading of shares personally. However it is noted that the provisions
of section 32 further stipulate that an individual trading with information obtained
from individuals connected with a company are also liable for insider trading under
the provisions of the Act. Any such attempt made by Mr. Martin would therefore
presumably be unsuccessful.
Therefore it can be concluded that should the reported facts prove to be correct, Mr.
Martin may find himself connected to the fraudulent practice of insider trading
which is punishable as an offence in Sri Lanka.

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PART A – BUSINESS TAXATION

SECTION 2

1 Minuki Trading PLC

A Minuki Trading PLC
Computation of Taxable Income & Income Tax Payable
For the Y/A 2014/15

Sources of Income (Rs. 000)

Profit From business – Schedule 01 126,925
Interest Income 750
Total statutory income 127,675
Deduction under section 32 -
Assessable Income 127,675
Qualifying payments
Donation to the government (1,400)
Taxable Income 126,275

Tax liability
Tax on taxable income – 126,275* 28% 35,357
Tax on dividend distributed
Total dividend 1,800
Dividend paid out of dividend received (550) 125
1250 * 10%

Deemed dividend tax

1/3 of Distributable profit 20,874
(62,622 * 1 / 3)
Less – dividend distributed (1,800) 2,861
Excess 19,074 * 15%

Total tax payable 38,343

Less: Tax payments 7,500
Notional tax credits on interest on treasury bills 75
Balance Tax Payable/(Refund Due) 30,768

Schedule 01
Adjusted Profit from Business

+ -

Net Profit / (Loss) Before Tax 107,241

Less: Other Income

Dividend 550

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Interest On treasury bills 675

Profit on disposal 800
Rent Income – Business income -
Profit on sale of shares 258

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Add: Disallowed Expenses

Depreciation 28,000
Capital Allowance

Asset Value Year Rate Allowan

ce
Land 22,000 No allowance
Fences 3,000 2010/11 6, 2/3% 200
Buildings
Kalutara 12,000 Fully claimed
Kandy 7,500 2012/13 6, 2/3% 500
Furniture (3,500 – 1520) 2014/15 20% 396
8,000 2012/13 20% 1,600
Motor Vehicle 2,500 No C/A
3,000 No C/A
5,000 2011/12 20% 1,000
2,025 2011/12 20% 405
Plant and 5,000 2012/13 33, 1/3% 1,667
machinery
2,000 No C/A
(6,500 – 300) 2014/15 33, 1/3% 2,067
inspection cost
not allowed
16,200 12.5% 2025 9,860

Disposal of furniture
Sales proceeds 3,200
Tax written down value
Cost of the asset 2,800
Capital allowance
(2800*20%*2) 1,120 (1,680) - -
Taxable profit 1,520

Since the replacement is a qualifying replacement and

therefore disposal profit will not be taxed. Capital
allowance of the new asset will be calculated on 3,500 –
1520 = 1,980

Advertising - Salaries and wages paid to members - -

allowed
Staff Vacancy advertisement allowed - -
Advertising outsides Sri Lanka allowed for export - -
promotion
Other Advertising – 25% disallowed (1000*25%) 250
Bad debts provision - Specific provision allowed - -
General Provision not allowed 820

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Bad debts recovered - taxed - -

Travelling expenses – Motor vehicle use for business - -
allowed
Residence to Office disallowed 85
Office to bank allowed - -
Foreign travelling – promotion of products and cost of - -
passage brought allowed.
Other Foreign travelling (5000-2500-800=1700) is limited 100
to 80Mn * 2%=1600
Ground rent – allowed only paid and from 2014/15 ground 25
rent is a business receipt and not coming under section
32.(175-150)
Donations 1,750
Entertainment expenses 627
Repair expenses on rented building – limited to 25% on 170
gross rent (50*12*25%)
Legal fees on loan recovery is allowed - -
139,068 12143

(12143)
Adjusted business profit 126,925

b). Computation of Distributable Profits

Book Profit As per the Financial statements 107,241

Less
Tax on taxable income 35,357
Cost of capital asset acquired during the year 10,000
(6,500 + 3,500) 61,884

Add
Depreciation for during the year additions 738
(3,500*10%*3/12 + 6,500 * 10%)

Distributable profit 62,622

Minimum distribution should be made is (62,622* 10%) 6,262

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2 House for blind

Part A
Angulana house for blind
Computation of taxable income

Rent Income – schedule 01 877,500

Interest income – schedule 02 50,000
Total statutory income 927,500
Less
Deduction under section 32
Adjusted loss (927,500*35%) 1,590,000
Limit (1,100,000 x 35%) (385,000) (324,625)
Balance carried forward 1,205,000

Assessable income 602,875

Less – Tax free allowance (500,000)
Less – Qualifying payments 0
Taxable income 102,875

Computation of tax
102,875 x 10% = 10,287

Schedule 01 – Rent income

Gross Rent 1,200,000
Less – Rates (30,000)
1,170,000
Less – 25% allowance for repair 292,500
Net Rent 877,500

Schedule 02 – Interest income

Fixed Deposits - (Final tax deducted therefore not taxable)
Savings – 50,000 (Final tax not deducted therefore taxable)

Schedule 03 – Business income

+ -
Surplus for the year 280,000
Donations 500,000
Rent 1,200,000
Interest on fixed deposits 300,000
Interest on savings 50,000
Depreciation 100,000

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Expenses on building rent 100,000

Capital allowance – Furniture 100,000 x 20% 20,000
480,000 2,070,000
(2,070,000)
Adjusted business Loss (1,590,000)

Part B
To decide whether the organization is to be an association or not
Total income 7,817,500
Membership Income 5,717,500 = 73%
Adjusted for net profit
+ -
Net profit 2,623,000
Depreciation 200,000 1,200,000
Staff training – Allowable expense
Provision 200,000
Building maintenance 200,000
Rates 100,000
Advertising – (100,000 x 25%) 25,000
Entertainment 50,000
3,398,000 (1,200,000)
(1,200,000)
Adjusted business profit 2,198,000

Computation of taxable income

Business adjusted profit 2,198,000

Investment income
Rent income
Gross rent 1,200,000
Rates (100,000)
1,100,000
25% repair (275,000)
Net rent 825,000 825,000
Interest Income 500,000
TOTAL 1,325,000

Taxable Profit 2,198,000

Adjusted profit 1,325,000 whichever is higher
Investment Income
Therefore 2,198,000 x 10% = 219,800

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