(a) The Balance Sheet of AB Ltd. as on March 31, 2022 is as under:
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I. Equity and Liabilities
1. Shareholders’ Funds :
(a) Share Capital : 16000 Equity Shares of ₹ 100 each fully paid 16,00,000
(b) Reserves and Surplus (–) 21,40,000
2. Non-Current Liabilities :
8% Debentures 28,00,000
Accrued Interest 1,40,000
3. Current Liabilities :
Sundry Creditors 9,00,000
Income Tax Liability 20,000
Total 33,20,000
II. Assets
1. Non-Current Assets : Land, Building and Machinery 28,00,000
2. Current Assets :
Stock 2,00,000
Sundry Debtors 80,000
Investments 30,000
Cash at Bank 2,06,000
Cash in Hand 4,000
Total 33,20,000
The fixed assets are heavily overvalued. A scheme of reorganization was prepared and passed. The salient points of the scheme are the following :
(i) Each share shall be sub-divided into ten fully paid Equity Shares of ₹ 10 each.
(ii) After such sub-division, each shareholder shall surrender to the company 90% of his holding, for the purpose of re-issue to debenture holders and creditors so far as required and otherwise for cancellation.
(iii) Of those surrendered, 100000 Equity Shares of ₹ 10 each shall be converted into 8% Preference Shares of ₹ 10 each fully paid for debenture holders.
(iv) The debenture holders’ total claim shall be reduced to ₹ 10,00,000. This will be satisfied by the issue of 100000 Preference Shares of ₹ 10 each fully paid.
(v) The claim of sundry creditors shall be reduced by 80% and the balance shall be satisfied by allotting them Equity Shares of ₹ 10 each fully paid from the shares surrendered.
(vi) Shares surrendered and not re-issued shall be cancelled.
Assuming that the scheme is duly approved by all parties interested and by the Court, draft necessary Journal Entries and Balance Sheet of the company after the scheme has been carried into effect.
(b) A newly setup manufacturing company is planning to produce a product that will be sold for ₹ 150 per unit. The demand of the product is estimated at 10000 units per year. The company has the choice of two machines (i.e., Machines A and B), each of which has a capacity of producing 10000 units per year. Machine A would have fixed costs of ₹ 4,00,000 per year and would yield a profit of ₹ 5,00,000 per year on sale of 10000 units. Machine B would have fixed costs of ₹ 2,80,000 per year and would yield profit of ₹ 3,20,000 per year on sale of 10000 units. Variable costs behave linearly for both machines.
Calculate the volume of sales at which the costs of two machines will be indifferent.
(c) What is the relevance of residential status as per the Indian Income-tax Act, 1961? Discuss in detail how the residential status of an individual is determined for income-tax purposes.