Introduction:

2. “Enterprise means an industrial undertaking or a business concern or any other establishment by whatever name called, engaged in the manufacturing or production of goods, in any manner, pertaining to any industry specified in the 1st schedule to the Industries (Development and Regulation) Act, 1951 or engaged in providing or rendering of any service or services.”

3. Enterprises can be classified into following forms on basis of size of Industry, choice of the business activity; etc.

Micro Enterprises :

• It is an enterprise engaged in the manufacturing or production of goods pertaining to any industries specified in the 1st schedule to the Industries (Development and Regulation) Act, 1951 where the investment in plant and machinery does not exceed 25 lakh rupees.
• In case of enterprises engaged in providing or rendering of services, it is micro where investment in equipment does not exceeds 10 lakh rupees.
• It is the most frequent form of business in developing countries.
• It requires small amount of capital for its formation.
• It is simple to operate.
• It makes use of local product and skills.
• It helps in creating jobs as it is labour intensive.
• It uses micro loans or micro credit for its finance.
• Owners of micro enterprises are known as entrepreneurs.
• It is a catalyst for comprehensive community development.

It provides following advantages to the country’s economy :

• Creates Jobs
• Enhances income
• Lower cost
• Show most promise for sustainable development.

Small Scale Enterprises/Small Scale Industries (SSI)

• Initially they were classified into those using power with less than 50 employees and those not using power with the employee strength being more than 50 but less than 100.
• Plays a vital role in generating employment and increasing commercial activities.
• These are organised on small scale, producing goods with the help of small machines, hired labour and power.
• It is an enterprise engaged in the manufacture or production of goods pertaining to any industry specified in the 1st schedule to the Industries (Development and Regulation) Act, 1951, where the investment in plant and machinery is more than 25 lakh rupees but does not exceed 5 crore rupees.
• In case of the enterprises engaged in providing or rendering of services. It is a small enterprise, where the investment in equipment is more than 10 lakh rupees but does not exceed 2 crore rupees.

They are of two types:

• Modern Small Industries

Capital source investment on plant and machinery to differentiate from small scale and large scale or medium scale.

1. Highly labour intensive
2. Cannot provide full time employment to workers
3. Provides part-time employment to agricultural labour and artisans
4. Example – Khadi, handloom, handicrafts, village industries etc.
5. In 1979-80, it provided 56% of total employment and 74% of output.
6. Handicrafts possess highest labour productivity. It also makes a significant contribution towards foreign exchange earning.

Modern Small Industries:

1. It makes use of highly sophisticated machinery and equipment.
2. Example – industries producing rubber products, chemical products, – hardware, electrical items etc.
3. In 1979 – 80, it provided only 33% of total employment.

It plays following role in Indian economy:
(i) Production: It helps in growth of country’s economy. It contributes almost 40% of the gross industrial value added in the economy.

(ii) Employment generation: After agriculture, it creates the largest employment opportunities for the Indian people.

(iii) Export: It plays a major role in Indian exports. It contributes 45%- 50% to Indian exports. Directly it accounts for nearly 35% of total exports and indirectly around 15%.

(iv) Opportunity: It provides enormous opportunities due to following reasons :

• Less capital intensive
• Government support and promotion
• Manpower training
• Export promotion
• Machinery procurement
• Raw Material procurement
• Growth in demand in the domestic market
• Funding & Financing and subsidies
• Reservation for exclusive manufacturers by S.S.I
• Tooling & testing support

(v) Increasing export potential for domestic products: It has played a major role in increasing the export potential of various Indian products.

(vi) Welfare: It improves the welfare position of people in following ways:

• It can be started by people of lower income group
• Increases the people’s income level and standard of living
• Reduces poverty
• Promotes equal income distribution
• Large proportion of income generated by these enterprises is distributed among workers

Large Scale Enterprises:

• It means those industries which require huge infrastructure, manpower and have influx of capital assets.
• It refers to industries with a fixed asset of more than 10 crore or 100 million rupees.
• Due to the IT Boom IT companies are also included in large scale industry.
• It uses both indigenous and imported technologies.
• They cater both the local and foreign markets.
• Example : iron and steel industry, textile industry, telecom industry, natural gas, mining, IT company etc.

Public Enterprises:

• it refers to business organisation owned, managed and controlled by local, central or state government. Whole or most of the investment is made by government itself.
• “Public enterprises are autonomous or semi autonomous corporations and companies established, owned and controlled by the state and engaged in industrial and commercial undertakings.”
• It is not only managed by government it’s also controlled by them.
• It is also known as Public Sector Enterprises.
• Example : HMT – Hindustan Machine Tools GAIL – Gas Authority of India, etc.

These were required due to following reasons :

• Private sector do not take interests in areas where –
• gestation period is long
• heavy investment is required
• profit margin is low
• Private sector prefer to set up their business in areas having certain natural advantages, thus leading to regional imbalances.

They possess the following characteristics:

• Government control: They are owned, controlled, managed and financed by State or Central government.
• Useful to various sectors: It serves people of ail sections of the community.
• Autonomous or semi – autonomous organisation: They may either be under the direct control of government or established under any statute or act.
• Providing service: It provides the people with essential commodities at most reasonable prices.
• Monopoly enterprises: It does not involve private participation, thus enjoy monopoly in its operations.
• Public accountability: They are liable to general public for their activities.
• Direct channel for use of foreign money.
• Agent for implementing government plans.
• Financial independence.

Following forms are prevalent in India for public enterprises:
(i) Departmental Undertaking: These are directly managed by different government departments. It is established for providing essential public utility services.
Example : Posts and Telegraph, Railways etc.

(ii) Government Company: These are companies registered as joint stock under Indian Companies Act, 2013. It refers to company in which 51% or companies under more of paid -up capital is held by Central or State Government.
Example : Hindustan Machine Tools Ltd (HMT), Bharat Electronics Ltd. etc.

(iii) Statutory/Public Corporation: These organisations are established under special act passed by Parliament or State Legislature.
Example : Life Insurance Corporation of India (LIC), Union Trust of India (UTI).etc.
a. In 1947, there were 3 departmental enterprises :

• Railways
• Post and telegraphs
• Defense production

b. Foundation of strong public enterprises in Indian economy was laid by our first Prime Minister Jawahar Lai Nehru. Other renowned personalities associated with this are :

• Josip Broz Tito
• Abdel Gamal Nasser

c. Presently number fo PSU’s have increased to 300 enterprises with a total investment of about 130 billion euros.

d. PSU’s account for nearly 20% of India’s gross national product (GNP). PSE’s contribute nearly 4% of total national savings.

e. Presently, PSE’s employs 1.9 million persons as compared to private sector which employs about 0.9 million persons only.

f. It provides a low rate of return on capital invested.

g. Government’s industrial policy was announced on 24th July, 1991. Following central PSEs were identified by Government as ‘Navratnas’ in July, 1997 :

• BHEL – Bharat Heavy Electronics Limited
• BPCL – Bharat Petroleum Corporation Limited
• GAIL – Gas Authority of India Limited
• SAIL – Steel Authority of India Limited
• MTNL – Mahanagar Telecom Nigam Limited
• ONGC – Oil and Natural Gas Corporation .
• HPCL – Hindustan Petroleum Corporation Limited
• IOC – Indian Oil Corporation
• NTPC – National Thermal Power Corporation

h. In October, 1997 some other PSE’s were included in Navratnas, thus giving them as ‘Miniratnas’

i. BIFR : Board for Industrial and Financial Reconstruction is set up by government for the revival of sick and loss making enterprise.

j. In 2010, the government established the higher Maharatna category, which raises a company’s investment ceiling from ₹ 1,000 crore to ₹ 5,000 crore. The Maharatna firms can now decided on investments of up to 15 per cent of their net worth in a project while the Navaratna companies could invest up to ₹ 1,000 crore without explicit government approval. Two categories of “Miniratnas” afford less extensive financial autonomy.

Guidelines for awarding ratna status are as follow:

 Maharatna Navaratna Miniratna Category-1 Miniratna Category-ll Eligibility Three years with an average annual net profit of over ₹ 5,000 crore, or Average annual Net worth of ₹ 15,000 crore for 3 years. or Average annual Turnover of ₹ 25,000 crore for 3 years ₹ 1,000 crore ₹ 5,000 crore, or free to decide on investments up to 5% of their net worth in a project A score of 60 (out of 100), based on six parameters which include net profit, net worth, total manpower cost, total cost of production, cost of services, PBDIT (Profit Before Depreciation, Interest and Taxes), capital employed, etc., and A company must first be a Miniratna and have 4 independent directors on its board before it can be made a Navaratna. Have made profits continuously for the last three years or earned a net profit of ₹ 30 crore or more in one of the three years. Have made profits continuously for the last three years and should have a positive net worth. Benefits for investment ₹ 1,000 crore ₹ 5,000 crore, or free to decide on investments up to 5% of their net worth in a project up to ₹ 1,000 crore or 15% of their net worth on a single project or 30% of their net worth in the whole year (not exceeding ₹ 1,000 crore). up to ₹ 500 crore or equal to their net worth, whichever is lower. up to ₹ 300 crore or up to 50% of their net worth, whichever is lower.

As on October, 2019 there are 10 Maharatnas, 14 Navaratas and Miniratnas in category 1 category 2

Note : From 1st December 2016 by an official notification, Government of India dissolved it and all proceeding to be referred to the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) as per provisions of insolvency and Bankruptcy Code.

Performance of Industry : 12th five year plan (2012-17) following schemes are:

• National Automotive Testing and R&D Infrastructure Project (NATRIP).
• Restructuring of PSEs under DHL
• Jagdishpur; UP Paper Mill Project of Hindustan Paper Corporation Lmt. (H.P.C.)
• Scheme for enhancement of competitiveness in Capital Goods Industry.
• Schemes for North Eastern Region (HPC; NPPC; CCI & AXCL).

Multinational Corporation (MNC’s/Multinational Enterprise (MNE)

• It refers to a corporation/enterprise which manages its production / delivers services in more than one country.
• “MNC is a corporation that has its management headquarters in one country called home countries, and operates in several other countries, called host countries.”
• These are large sized enterprises.
• There world wide activities are centrally controlled by its parent company.
• Example: MC Donalds, Honda, Toyota etc.
• U.S.A. among the biggest MNCs country.

MNC’s can functions in three ways:

• Headquarters is located in one nation while production facilities are located in one or more countries.
• Parent company is situated in one nation while other operating subsidiaries in other countries
• Headquarters is located in one country which looks after the wide conglomeration which stretch to several countries.

Reasons for growth of MNC’s can be as follows

• Low labour costs.
• Reduce transport and distribution costs.
• Securing supplies of raw material.

Following are the reasons why company extend into different country:

• Reduce the transportation/distribution cost
• Avoid custom duty/licensing
• Meet different rules and regulation
• Cost advantage- for example law labour cost
• Secures supplies of raw material in market
• Economic growth and Employment

• Provides employment to people of host countries, thereby enabling economic growth.
Generates new ideas and new technology which helps in improving the production quality, thereby improving the quality of human capital.
• Provides the host country with availability of high quality goods and services at reasonable prices.
• It contributes large amount to the government treasury of host country in form of huge taxes.
• It invests in the infrastructure of host countries.

 To Host Countries To Home Countries Raising the Investment Rate Accelerates Economic Growth Increases Exports and Reduces Imports Efficient Resource Utilisation. Support to enterprises of host countries Facilitates transfer of technology. Provides services of skilled professionals Benefits of Research & Development Increasing competition thus finishing monopolies Increased foreign exchange inflow International co-operation Promotion of Bilateral Trade Relations Optimum Resource Utilisatior

• Provides costly, outdated and obsolete technologies
• Charges heavy fees for their services.
• Reckless utilisation of resources, leading to extinction of non – renewable resources.
• Creates monopolies by acquiring control over markets of host countries.
• Adverse effects on life style/culture of people.
• They may avoid taxes by the way of transfer pricing.
• Profit maximization being their main objective, harms the national interest of host country.
• Interference in the economic and political systems of economy.
• Causes brain drain in the developing countries
• Develop monopolies which effect local market.

Multiple Choice Questions

Question 1.
Micro enterprises are the enterprises providing services, and where the investment in equipment exceeds 10 lakh rupees.
(a) True
(b) False
(c) Partly true
(d) Partly false
(b) False

Question 2.
Scale of business involves determination of:
(a) Capital Requirement
(d) All of the above
(d) All of the above

Question 3.
Micro enterprises are:
(a) Labor intensive
(b) Capital intensive
(c) Machine intensive
(d) Both (b) and (C)
(a) Labor intensive

Question 4.
(a) Full time employment
(b) Part time employment
(c) No employment
(d) All of the above
(b) Part time employment

Question 5.
Handloom is an example of:
(a) Small scale enterprise
(b) Modern small scale enterprise
(c) Micro enterprise

Question 6.
The agreement entered into by two countries in order to facilitate trade and removing restrictions is called _______.
(a) Liberal agreement
(b) Mutual agreement
(c) Co-operative agreement
(d) Bateral agreement
(d) Bateral agreement

Question 7.
For the goods having artistic features _______ enterprise is preferred.
(a) Large scale
(b) Small stale
(c) Micro
(d) Very large scale
(b) Small stale

Question 8.
Large scale business provides _______ economies.
(a) Internal
(b) External
(c) Both internal and external
(d) None of the above
(c) Both internal and external

Question 9.
“Public corporations are autonomous or semi- autonomous corporations and companies established, owned and controlled by the state and engaged in industrial and commercial undertaking.”
This definition is given by:
(a) N.N. Malaya
(b) A.H. Hansom
(c) O.L. Rehan
(d) LV. Starke
(a) N.N. Malaya

Question 10.
Public accountability and Government control are features of which type of enterprise:
(a) Micro
(b) MNC
(c) Large scale
(d) None of these
(d) None of these

Question 11.
Which of the following is not a type of public sector enterprise?
(a) Departmental undertaking
(b) Statutory corporation
(c) Subsidiary of public enterprise
(d) Government company
(c) Subsidiary of public enterprise

Question 12.
The advantages of MNC’s to the Home country include.
(a) Inflow of foreign exchange
(c) Both (a) and (b)
(d) Neither (a) nor (b)
(c) Both (a) and (b)

Question 13.
Foundation of public enterprises in India was laid down by:
(a) Indira Gandhi
(b) Jawaha, Lai Nehru
(b) Jawaha, Lai Nehru

Question 14.
PSLI’s account for _______ of India’s GNP.
(a) 10%
(b) 20%
(c) 30%
(d) 40%
(b) 20%

Question 15.
Government’s Industrial Policy was announced on _______.
(a) 24th July, 1990
(b) 24th July, 1997
(c) 24th July, 1991
(d) None of these
(c) 24th July, 1991

Question 16.
Which of the following is not a ‘Navratna’?
(a) GAIL
(b) NTPC
(c) LIC
(d) BHEL
(c) LIC

Question 17.
BIFR Means:
(a) Board for Indian financial Reserves
(b) Board for Industrial and Financial Resources
(c) Board for Industrial and Financial Reconstruction
(d) Board for International Fund Reserves
(c) Board for Industrial and Financial Reconstruction

Question 18.
Following is/are the main characteristics of MNC’s :
(a) Large size
(b) World wide activities centrally controlled by parent Company.
(c) Both (a) and (b)
(d) None of the above
(c) Both (a) and (b)

Question 19.
Which of the following is not a reason for MNC’s growth :
(b) Increased labour cost
(c) Reduced transport cost
(d) None of the above
(b) Increased labour cost

Question 20.
(a) Employment Generation
(b) Economic Growth
(c) Efficient Resource Utilisation
(d) All of the above
(d) All of the above

Question 21.
Basis for classification of Industries are _______.
(a) Size of Industry
(d) Both (a) & (b).
(d) Both (a) & (b).

Question 22.
Population engaged in Micro enterprises produces non-monetary wealth for ________.
(b) Serving society
(c) Self consumption
(d) Sale.
(c) Self consumption

Question 23.
Source of finance for Micro sector are-
(a) Micro loan
(b) Financial institution
(c) Formal source
(d) Informal source.
(a) Micro loan

Question 24.
Capital requirement for Micro Enterprise should be (Service Producing) ________.
(a) Equipment not exceeding 10 lakh.
(b) Equipment not exceeding 12 lakh.
(c) Equipment not exceeding 25 lakh.
(d) Equipment not exceeding 01 lakh.
(a) Equipment not exceeding 10 lakh.

Question 25.
Micro enterprise are intensive therefore create _______.
(a) Capital, profit
(b) Labour, job
(c) Technological, capital
(d) Capital, job.
(b) Labour, job

Question 26.
Initially, Small scale Industry were classified on basis of ________.
(a) Number of employees
(b) Amount of capital
(c) Profit generating ability
(d) Power of production.
(a) Number of employees

Question 27.
Small Scale Industries are classified into ________.
(c) Modern, Ancient
(d) None of above:

Question 28.
S.S.I contributes ________ of the gross industrial value added in the Indian economy.
(a) 80%
(b) 20%
(c) 90%
(d) 40%.
(d) 40%.

Question 29.
Which of these is not an opportunity for SSI ________.
(a) Less Capital Requirement
(b) Finance & Subsidies
(c) Export Promotion
(d) State Control.
(d) State Control.

Question 30.
Increasing export potential for Indian products enabled our country to achieve _______.
(a) Fashion Technology
(b) Information Technology
(c) Design Technology
(d) All the above.
(d) All the above.

Question 31.
Which of the following is not the role of SSI in Indian Economy
(a) Employment Generation
(b) Export Barrier
(c) Tooling & Testing Support
(d) Improved Welfare Position.
(c) Tooling & Testing Support

Question 32.
Large Scale Industry comprises of ________.
(a) Sophisticated Products
(b) Engineering Product
(c) Iron & Steel Industry
(d) All of the above.
(c) Iron & Steel Industry

Question 33.
The public sector enterprises are owned by ________.
(a) Government
(b) Individual
(c) Society
(d) Public.
(a) Government

Question 34.
Most of the investment done in PSE are by ________.
(a) Individual
(b) Private Body
(c) Government
(d) Non-Profit-organisation.
(c) Government

Question 35.
The enterprises which are under monopoly of state enterprises are ________.
(a) Railway
(b) Post & telegraph
(c) Energy Production
(d) All of above.
(d) All of above.

Question 36.
Characteristic of public enterprise to be responsible for nation denotes ________.
(a) Public Accountability
(b) Government Accountability
(c) Owner Accountability
(d) Ethics Accountability.
(a) Public Accountability

Question 37.
Arranging day to day finance is the characteristic of ________.
(a) Private enterprise
(b) Public enterprise
(c) MNC
(d) Small scale industries.
(b) Public enterprise

Question 38.
Statutory corporation is not created by Act of Government ________.
(a) False
(b) Partly True
(c) True
(d) Both
(a) False

Question 39.
Government company refer to the company in which 51 % of ________ is held by the Government?
(a) Control
(b) Paid up capital
(c) Called up capital
(d) Unpaid capital
(b) Paid up capital

Question 40.
Departmental enterprises comprises of ________.
(a) Railway, Telegraph, Defence
(b) Telecom, Railway, Defence
(c) Transport, Railway, Defence
(d) Network, Transport, Railway.
(a) Railway, Telegraph, Defence

Question 41.
Person responsible for the collection of taxes on behalf of the Government are ________.
(a) Cashier
(b) Exchequer
(c) Manager
(d) Controller.
(b) Exchequer

Question 42.
Which of them is a Navrafna’s of Government?
(a) IOD
(b) LOC
(c) IOC
(d) BOC
(c) IOC

Question 43.
Which of them is not among the Navratna’s?
(a) HMT&LIC
(b) BHEL&GAIL
(c) MTNL&BPCC
(d) SAIL & ONGC.
(a) HMT&LIC

Question 44.
LDC, stand for ________.
(a) Local development country .
(b) Less developments company
(c) Lack of developed company
(d) Less developed country.
(d) Less developed country.

Question 45.
Which of them is not a merit of MNCs ________.
(a) Optimum utilization of resources
(b) Charge heavy fees
(c) Break monopolies
(d) Transfer of technologies.
(b) Charge heavy fees

Question 46.
MNCs have their head quarters in more than ________ country/countries
(a) 1
(b) 2
(c) 4
(d) 6
(a) 1

Question 47.
An enterprise engaged in production is a micro enterprise if the investment in Plant & Machinery does not exceed _______.
(a) 25 lakhs
(b) 1 Crore
(c) 50 lakhs
(d) None of the above
(a) 25 lakhs

Question 48.
In India, a large scale enterprise refers to an enterprise in which investment in fixed assets is more than _______.
(a) 100 million
(b) 500 million
(c) 250 million
(d) 1000 million
(a) 100 million

Question 49.
How many PSU’s are currently operating in India?
(a) 247
(b) 300
(c) 259
(d) 350
(b) 300

Question 50.
How many companies in India are included in Miniratnas?
(a) 73
(b) 60
(c) 100
(d) 110
(a) 73

Question 51.
Which of the following is not an advantage of MNC’s ________.
(a) It helps in generating tax revenues for the host
(b) It helps in generating employment opportunities
(c) Providing high quality goods
(d) Helps in development of backward areas
(d) Helps in development of backward areas

Question 52.
BHEL, HPCL, NTPC, ONGC, SAIL are the examples of ________.
(a) Navratnas
(b) Miniratnas
(c) Swarnratnas
(d) Kohinoors
(a) Navratnas

Question 53.
The contribution of PSU’s in the total national savings is ________.
(a) 4%
(b) 6%
(c) 1%
(d) 5%
(a) 4%

Question 54.
The number of people currently employed in PSU’s in India are around _______.
(a) 1.9 million
(b) 3 million
(c) 4.8 million
(d) 5 million
(a) 1.9 million

Question 55.
Which of the following statements is not true in respect of PSU’s?
(a) It has played a significant role in the Indian Economy
(b) The rate of return is high
(c) The total saving rate in PSU’s is nearly 35%
(d) The overall performance of most of the PSU’s is not satisfactory
(b) The rate of return is high

Question 56.
Which of the following statement is true?
(a) The traditional small scale industries are labour intensive
(b) Modern small scale industries use highly sophisticated machinery and equipments
(c) Neither (a) nor (b)
(d) Both (a) and (b)
(d) Both (a) and (b)

Question 57.
A corporate body created by Parliament or state legislature by a special Act defining its powers i.e. functions etc. is called ________.
(a) Departmental undertaking
(b) Government company
(c) Statutory corporation
(d) Public company
(c) Statutory corporation

Question 58.
An organisation established for providing essential services like railway, postal services, broadcasting etc. is called _______.
(a) Statutory Corporation
(b) Departmental undertaking
(c) Public Company
(d) Government company
(b) Departmental undertaking

Question 59.
A government company refers to a company in which _______ is held by the central or state government
(a) 51 % of authorised capital
(b) 51% of Subscribed capital
(c) 51% of nominal capital
(d) 51 % of the paid up capital
(d) 51 % of the paid up capital

Question 60.
Life Insurance Corporation, State Trading Corporation etc. are the examples of ________.
(a) Statutory corporation
(b) Government company
(c) Departmental undertaking
(d) Public company
(a) Statutory corporation

Question 61.
ONGC, BHEL, Hindustan Machine Tools Limited etc are the examples of ________.
(a) Statutory corporation
(b) Government company
(c) Departmental undertaking
(d) None of the above
(b) Government company

Question 62.
The country in which the headquarters of MNC are located is called ________.
(a) Host country
(b) Home country
(c) Principle country
(d) None of the above
(b) Home country

Question 63.
The foreign country in which the MNC operates its business is called as ________.
(a) Host Country
(b) Home Country
(c) Foreign country
(d) None of the above
(a) Host Country

Question 64.
Bringing credits savings and other essential services to the poor is called ________.
(a) Poor Finance
(b) Micro Credit
(c) Micro Finance
(d) Both (b) & (c)
(d) Both (b) & (c)

Question 65.
Which one of the following is true about micro enterprises?
(a) Labour intensive
(b) Capital intensive
(c) Technology intensive
(d) None of the above
(a) Micro enterprises refers to enterprises where the investment in plant and machinery does not exceed 25 lakh rupees. These enterprises require small amount of capital for its formation. Moreover, it helps in creating jobs as it is labour-intensive.

Question 66.
Which one of the following is a key in the firm’s growth phase?
(a) Increase in scale
(b) Increase in profit
(c) Increase in capital
(d) All of the above
(d) Increase in firms scale, capital and profit all will result in firms growth. Increase in scale refers to the increase in production. Increase in capital also means firms factors of production. Moreover, increase in firm’s profits will result an increase in firms overall growth.

Question 67.
In which year was the new economic policy ushered that gave a new direction to Indian economy?
(a) 1993
(b) 1989
(c) 1991
(d) 1985
(c) To improve the performance of the public enterprise, Government of India has taken several measures. On 24th July, 1991 the Government of India announced its industrial policy to improve the j performance and portfolio of public sector enterprises.

Question 68.
Which of the following is not true about the purpose of a business?
(a) Earning profit
(b) Supply of goods and services
(c) Creating job opportunities
(d) Performing sovereign functions
(d) Business is an organisation in which organised production and exchange of goods and services are undertaken with a view to earn profits. It can also be referred as process of organising all the steps that are required to be undertaken for establishment of relationship between men, material and machinery in order to carry on business efficiently.

Thus, business is carried on for the purpose of:

• Earning profit
• Supplying goods and services
• Creating job opportunities

Question 69.
The definition of Micro, Small and Medium Enterprises (MSMEs) in India is based on:
(a) Total sales of the unit
(b) Investment in machines and equipments
(c) Market coverage
(d) Export turnover
(b) The definition of Micro, Small and medium enterprise in India is based on investment in machines and equipments. Under Micro Enterprise Investment in Plant and machinery does not exceed 25 Lakh rupees while Investment in equipment does not exceed 10 Lakh rupees. In small enterprises investment in P&M is more than 25 Lakh while Investment in equipment does not exceeds 2 crore.

Question 70.
The abbreviation ‘BIFR’ with reference to sick companies in India means:
(a) Board for Indian Financial Reserves
(b) Board for Industrial and Financial Resources
(c) Board for Industrial and Financial Reconstruction
(d) Board for International Fund Reserves
(c) The government has taken every step to revive and restructure the public sector enterprises to improve their performance, productivity and profitability for sick companies in India, the enterprises are referred to Board for Industrial and Financial Reconstruction to prepare appropriate revival or rehabilitation package.

Note : From 1st December 2016 by an official notification, Government of India dissolved it and all proceeding to be referred to the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) as per provisions of insolvency and Bankruptcy Code.

Question 71.
Which one of the following is a push factor influencing the internationalisation of a company?
(a) Difficulty in finding skilled staff in the home country
(b) The need to be close to key resources
(c) Low-cost labour in other countries
(d) Financial incentives from governments in emerging markets.
The following are some reasons to expand into different countries:

• Reduce transport and distribution cost.
• Meet different rules and regulations.
• Secure supplies of raw material or market.
• Cost advantage-e.g. low labour cost.

Thus low labour cost in other countries is one of the push factor influencing the inter nationalisation of a company.

Question 72.
Foundation of public enterprises in India was laid down by:
(a) Indira Gandhi
(b) Jawaharlal Nehru
(b) The foundation of the strong public enterprises, particularly the goods producing section in the Indian economy was firmly laid by our Prime Minister Jawahar Lai Nehru who was also inspired and supported by the Josip Aiigned movement.

Question 73.
Transfer pricing litigations are generally related to _______.
(a) Domestic Companies
(b) Multinational Companies
(c) Public Enterprises
(d) Statutory Authority.
(b) Multinational Companies have various disadvantages associated with it one of which is – Transfer pricing enables MNC’s to avoid taxes by manipulating prices in the case of intra-company transactions. Thus, Transfer pricing litigations are generally related to Multinational Companies.

Question 74.
Coca-Cola is an example of:
(a) MNC
(b) Indian Company
(c) Foreign Company
(d) None of these
(a) Coca Cola is an example of MNC. MNC refers to a corporation / enterprise which manages its production / delivers services in more than one country.

Question 75.
________ is responsible for revival of Public Sector Enterprises.
(a) NTPC
(b) NCLT
(c) BRPSE
(d) MNC
(c) BRPSE : Boards for reconstruction of Public Sector Enterprises. Established in December, 2004 as advisory body to advise the Government on the strategies, measures and schemes related to strengthening, modernizing, reviving and restructuring of public sector enterprises.

Question 76.
Microsoft is a:
(a) Indian Government Company
(b) Multinational Company
(c) Statutory Corporation
(d) Public Limited Company
(b) Multinational Corporation is a corporation that manages production or delivers services in more than one country. Microsoft is also a Multinational Company.

Question 77.
Advantages of multinationals to home countries are _______.
(a) Ensure optimum utilisation of resources
(c) Promote global Co-operations
(d) All of the above
(d) Advantages of Multinational to home countries are:

• Facilitate Inflow of Foreign Exchange
• Promote Global Co-operations
• Ensure Optimum Utilization of Resources

Question 78.
For the goods having artistic features size of enterprise is preferred.
(a) Small scale
(b) Large scale
(c) Corporation
(d) Very large
(a) Traditional as small scale industries includes goods having artistic features like Khadi handloom, village industries handicrafts, sericulture, coin etc.

Question 79.
Which is not a criterion for defining small business?
(a) Usually employs fewer people
(b) Is Geographically localised
(c) Is considered smaller in relation to competitors
(d) Financed by a large number of investors.
(d) An Industrial unit can be categorised as a small scale unit if it fulfills the capital investment limit fixed by the Government of India for small scale sector. The investment in plant & machinery is more than 25 lakhs but does not exceeds 5 crores and the number or investors ar-e limited.

Question 80.
Push factors for locating a business includes:
(a) Availability of skilled labour
(b) Rising competition in an area
(c) Government support
(a) Push factors for locating a business includes availability of skilled labour, availability of raw materials etc.

Question 81.
The size and structure of business depends on many factors which (are):
(a) Arbitrary and random
(b) In the control of enterprises
(c) Range from internal to external factors which are beyond the control of enterprises
(d) Beyond the control of enterprises
(c) The size and the structure of business depends on many factors which range from internal to external factors which are beyond the control of the enterprises.

Question 82.
Which of the government agency look after the industrial sick unit?
(a) BRPSE
(b) BIFR
(c) IDBI
(d) All are applicable
(b) BIFR looks after Industrial sick units. The government has taken every step to revive and restructure the public sector enterprises to improve their performance, productivity and profitability for sick companies in India. The enterprises are referred, to Board for Industrial and financial reconstruction (BIFR) to prepare revival or rehabilitation package.

Note : From 1st December 2016 by an official notification, Government of India dissolved it and all proceeding to be referred to the National Company Law Tribunal (NCLT) and National, Company Law Appellate Tribunal (NCLAT) as per provisions of insolvency and Bankruptcy Code.

Question 83.
MNCs have their head quarters in more than countries/country.
(a) 6
(b) 2
(c) 4
(d) None of these
(d) Multi National Corporation (MNC) or Multi National Enterprise (MNE) is a corporation enterprise which has its headquarters in one country and manages production or delivers services in more than one country.

Question 84.
What is the full form of SSI?
(a) Small scale industries
(b) Small scale enterprises
(c) Large scale enterprises
(d) Public enterprises
(a) Full form of SSI is Small Scale Industries.

Question 85.
A public sector enterprise is suitable for:
(a) Fierce competitive projects
(b) High capital intensive projects
(c) Low capital intensive projects
(d) Low technology intensive projects
(b) Public sector enterprise is suitable for high capital intensive projects as it denotes “state ownership and operation of industrial, agricultural, financial and commercial undertakings”. It is thus liable to the general public for their performances. It helps to reduce regional imbalances altogether.

Question 86.
Handicraft industry is a:
(a) Heavy capital intensive industry
(b) Medium/small scale industry
(c) Technical industry
(d) Macro industry.
(b) Handicraft industry is a medium/small scale industry which are organised on a small scale and produce goods with the help of small machines, hired labour and power. Traditionally these industries are highly labour-intensive.

Question 87.
A Multinational Corporation (MNC) operates in:
(a) More than 1 country
(b) More than 5 countries
(c) More than 10 countries
(d) More than 2 countries.
(a) A multinational corporation or multinational enterprise is a corporation that manages its production or delivers its services in more than one country.

Question 88.
A Multinational Corporation (MNC) operates in:
(a) More than 2 countries
(b) More than 10 countries
(c) More than one country
(d) More than 5 countries
(c) Multinational Corporation refers to a corporation which manages its production/delivers services in more than one country. It has its management quarters in one country called home country and operates in several countries called host countries.

Question 89.
A(n) ________ is a group of firms producing a similar product or service, such as soft drinks, electronic games or computers.
(a) Cluster
(b) Division
(c) Sector
(d) Industry
(d) In modern economies, there are dozens of industry classifications, which are typically grouped into larger categories called sectors, with individual companies being classified into an industry based on their largest sources of revenue. Thus, an industry is the group of firms producing a similar products and services.

Question 90.
Modern small-scale units are:
(a) Labour intensive
(b) Material intensive
(c) Technology intensive
(d) Capital intensive
(c) Small scale enterprises are organized on the small scale, producing goods with the help of small machines, hired labour and power but in the modern small scale units, it makes the use of highly ‘ sophisticated machinery and equipment.
Example: Industries producing rubber products, chemical products etc.

Question 91.
The process under which profits go back to the head quarters of the MNC, rather than staying in the host country is called:
(a) Remittance of profits
(b) Transferring of profits
(c) Sending of profits
(d) Repatriation of profits
(d) The word Repatriation means return of money back to ones’ own country. The process of sending profits back is called Repatriation of profit.

Question 92.
The definition of Micro-Small and Medium Enterprises (MSMEs) in India is based on:
(a) Total sales of the unit
(b) Investment in machines and equipments
(c) Market coverage
(d) Export turnover
(b) Definition of Micro-small and medium enterprises based on ‘Investment in plant and machinery and its equipment’ in India.

In Micro enterprises, investment does not exceed 25 lakh rupees. In case of small enterprises, investment is more than 25 lakh rupees but not exceed five crore rupees. In medium enterprises, investment is more than 5 crores rupees but not more than 10 crore rupees.

Question 93.
Which of the following is a Push Factor influencing the internationalisation of a company?
(a) Difficulty in finding skilled staff in the home country
(b) The need to be close to key resources
(c) Low cost Labour in other countries
(d) Financial incentives from governments in emerging markets.
(c) Factors influencing the internationalisation of a company:

• Reduce transportation costs and distribution costs
• Meet different rules and regulations
• Secure supplies of raw materials / markets
• Cost advantages – i.e Law Labour costs
• Economic growth and employment
• Advantages of MNCs Hence, Option (C) is Correct.

Question 94.
Foundation of public enterprises in India was laid down by:
(a) Indra Gandhi
(b) Jawaharlal Nehru
(b) The foundation of public enterprises particularly the goods producing sectors in Indian economy was firm laid down by our first prime minister Jawahar Lai Nehru who was also inspired and supported by Josip Broz Tito and Abdul Qamal Nasser.

Question 95.
Which one of the following is true about Investment Cost per Job?
(a) Investment costs per Job are high in large and medium industries.
(b) Investment costs per job are high in small industries.
(c) Investment costs per job are high in micro enterprises.
(d) Investment costs per job are higher in micro enterprises than small scale enterprises.
(a) Investment Costs per job are low in Micro enterprises but high in large and medium enterprises.

Question 96.
Full form of MNC _______.
(a) Mega Nurturing Corporates
(b) Mega National Corporations
(c) Multinational Corporations
(d) None of these
(c) MNC: Multinational Corporations.

Question 97.
NCLT given a delay period for filing _______.
(a) of 10 days
(b) of 100 days
(c) of 900 days
(d) of 90 days
(d) NCLT given a delay period for filing of 90 days

Question 98.
BRPSE stands for:
(a) Board of Reconstruct Private Sector Enterprises
(b) Board for Reconstruction Public Sector Enterprises
(c) Board for Remuneration Partition and Serve Enterprises
(d) None of these
(b) BRPSE: Board for Reconstruction Public Sector Enterprises.

Question 99.
Transfer pricing litigations are generally related to:
(a) Domestic Companies
(b) Multinational Companies
(c) Public Enterprises
(d) Statutory Authority
(b) Multinational companies have various disadvantages associated with it, one of which is that transfer pricing enables it to avoid taxes by manipulating prices in case of intra-company transactions. Thus, transfer pricing litigations are generally related to multinational companies.

Question 100.
Trade between Home country to foreign country?
(a) Multinational country
(b) International
(c) Bilateral country
(d) None
(a) Multinational corporations (MNCs) are key agents transforming the international political and economic landscape. Because they are highly visible organisations with great power and mobility, they inspire both awe and fear.

Question 101.
The capital market intermediaries act as a link between?
(a) Investors and issuers
(b) Investors and regulators
(c) Regulators and issuers
(d) Regulators, investors, issuers
(d) In the context of capital market, capital market intermediaries are an important constituents of overall governance framework. Being an important link between regulators, investors and issuers, therefore expected to ensure that their internal control are so efficient that ensure effective investor service at all times.

Question 102.
Maharatna involves _______.
(a) NTPC
(b) ONGC
(c) SAIL
(d) All of the above
(d) Maharatna involves 7 companies are:

• NTPC
• ONGS
• SAIL
• BHEL
• IOCL
• CIL
• GAIL

Question 103.
Which of the following are included in traditional small industries.
(b) Sericulture
(c) Both ‘A’ and ‘B’
(d) None
(c) Traditional small industries involved Khadi and Handloom and sericulture as they are more labour intensive.

## Planning – Business Management Ethics and Entrepreneurship Notes

→ Planning is a Rational Approach to Future:
Definitions:
Planning is forecasting and deciding in advance a course of action to be followed and activities to be pursued in future but mere forecasting is not planning. Planning is a rational approach to the future.

→ By Philip Kotler:
“Planning means deciding in the present what to do in the future. It is the process whereby companies reconcile their resources with their objective and opportunities.”

→ By George R. Terry:
“Planning is the selecting and relating of facts and the making and using of assumptions regarding the future in the visualisation and formulation of proposed activities believed necessary to achieve desired results”.

→ It is an all-pervasive and a fundamental function of management.

→ With the above definitions, it is very clear that planning involves deciding in advance what is to be done and where, how and by whom it will be done.

→ Planning is a mental work and includes looking in the future and forecasting on the basis of estimates available.

→ More important for higher level of management.

→ Merely ascertaining the future is not planning till it is followed by making provision for it.

→ Planning deals with future and forecasting management does not plan about past but guided by past performance.

Features of Planning:

• It is a primary function: Planning prevails at all the levels of management. It is thus the function of every manager.
• It is a continuous function: Because plans have to be revised in the light of changing environment and also different functions overlap each other, thus planning process has to be continuously repeated.
• Pervasive function: Planning pervades at all levels and all departments of an organisation. The planning horizons broaden and the implications of plans becomes wider as one goes up the level in the management hierarchy.

Importance of Planning:
Planning creates employees conscious of enterprises objectives:
Since the process starts with a clear definition of objectives of Individual department and organisation as a whole, the employees look at the organisation in its entirety which makes possible effective achievement of goals. Objectives represent endpoints of planning.

Planning leads to economy In operation:
It improves the effectiveness of all other functions of management and ensures coordinated functioning of efforts throughout the enterprise.
Planning for repetitive or routine matters reduces the need to revise the whole problem.

PlannIng precedes control:
Management function of control seeks to check the performance against some predetermined standards or projected course of action established through planning process. Control cannot exist without planning.

PlannIng provides a precIous managerial tool for the future:
It Is through this process that forecasting can be done about the future events and activities and a suitable course of action can be found on the basis of these forecasting results. Though forecasting is its essential characteristics, the task of planning does not end merely with assessing the future.

Planning influences the efficacy of other managerial functions:
Planning makes the task of managing more effective and improves efficiency of other functions of management.

Limitations of Planning

• Planning premises may not be fully reliable:
Planning is always done on the basis of predictions. Since future is uncertain, planning is also subject to uncertainty.
• Rapidity of changesets another limit to planning:
Rapid changes in business environment bring instability and makes the planning job more difficult.

Availability of time and cost involved:
During an emergency situation, decisions have to be taken without planning in advance. Such decisions may result in failure due to shortage of time period. Similarly, longer duration plans involve more cost. Greater are the details more will be the cost. Benefits expected to be derived from the planning should be more than the cost involved. Ascertaining the benefits & cost of planning is a difficult task.

Management and personnel philosophy – A serious limitation: Planning cannot be done with old philosophies of management or with their concepts and beliefs in mind. Since psychologically people are resistant to change they have to be convinced of the value of change.

Procedural and policy rigidities come in the way for planning: Policies and rules once established are difficult to change. Planning may call for a change in the existing procedures. When planning has to go through such rigidities, it becomes a difficult job.

Powerful Internal Constraint in Planning
Capital invested in the firm: Powerful internal constraint in planning. Managers develop a strong tendency to recovery of capital sunk as a result of some of their earlier decision that future planning is constrained and limited to its recovery.

External constraints
These can be:

• Labour unrest and policies regarding thereto;
• Government rules and regulations.
 Types of Plans Plans Strategic Plan Tactical Plan Operational Plan Long term plan 3-5 years/above involves competitive analysis, SWOT etc. to compet effectiveness. Top-level managers form and execute them. Mid-term plan 1 to 3 years creates the blueprint for strategic plan. Middle managers consult with lower-level managers to develop the tactical plans. Short term plan maximum 1 year covers the entire organisation’s goals & day to day operations. Lower-level managers consult with middle managers.

Strategic Plans: They identify & target internal goals but provide a general guidance on how they can be attained.

Types of Assessment:
1. Environmental Assessment – Environmental assessment is the assessment of the environmental consequences (positive and negative) of a plan, policy, program or actual projects prior to the decision to move forward with the proposed action. It helps the smooth functioning of strategic plan.

2. Operational Assessment – To assess the competitive implications of resources and capabilities relative to other environments, organizations must question four major factors, which are as fallows.

• A resource is rare to the extent
• Capability to create a degree of limit ability
• A firm must have to maintain its coordination and organisation
• Sustaining four elements given above is known as distinctive competence

→  Planning Components
They are usually defined as:
Organisation Mission: It is a statement distinguishing the organisation from others of its type and explains the fundamental reason for existence.
it can be written or may be implicit.

Purpose of mission statement

• It Is a benchmark for managers.
• It defines common purpose and foster loyalty among employees.
• It is a guideline and future direction fOE- outsiders.

Purposes:

• The purpose or mission is a definitive statement of the goals of the organisation that ¡t has to achieve.
• It shows the way the management works towards the achievement of goals.
• Fundamental & unique purpose that sets ¡t apart from other enterprises.
• Reflects belief and philosophy of management.

Objectives:
Objectives should be clearty laid down and effectively communicated to all the employees.

• They are the end results of any process undertaken in an organisation and should be properly balanced.
• All the objectives must be reviewed continuously in. the light of organisational changes.
• Objectives can be individualistic or collective, short term or long term, tangible or intangible, generator specific.
• Peter F. Drucker has laid down eight key areas.

Objective should be clearly defined and communicated

• Market standing
• Innovation
• Productivity
• Physical and financial resources
• Profitability
• Management performance and development
• Work performance and attitude
• Public responsibility

→  PolicIes:
Policies are of great help in delegating of authority of a manager.

• These help the managers during the decision making pcocess.
• Policies define the course of action that should be undertaken to determine present and future decisions.
• Every manager has the power to make policies foc his own area of worl but that should be within the limits of his authority.
• They should be flexible because rigid policies does not enable the employees to take further initiatives.
• Policies cari be written, verbal or implied.
• It may pertain to sales, production, personnel, finance and purchase on the functional basis.

Procedures, Methods & Rules:
1. A procedure includes the exact steps in which any task must be undertaken and specifies the chronological sequence for handling future activities.
2. Methods involve a specific step that has to be followed.
3. Rules means any kind of regulation from which no deviation is possible. It can be in favour of against the organisation.
4. Policy is a guide to thinking, procedures are guide to action.

→ Budgets:

• Is a single-use plan
• They are statements of expected revenue or losses of the organisation in numerical terms.
• They are prepared with a view to control the monetary activities of the enterprise so that they fall in line with the anticipated limits.
• Budget T making is a planning process, whereas its administration is a part of controlling.
• Budget is a statement of income and expenditure.

→  Programme:

• These are usually supported by budgets.
• These include a brief description of work to be carried out in a proper sequence in order to achieve the goals.
• Programme is a complex structure of policies, procedures, methods, rule, budgets and other assignments that can originate at any level in the organisation can be major or minor programmes.
• Outline of plan of work to be carried.

→  Strategy:

1. Strategy is an interpretative planning and very popular in military science. ,
2. Anthony defines strategies as “the process of deciding on objectives of the organisation, on changes in these objectives, on the resources used to attain these objectives, and on the policies that are to govern the acquisition, use and disposition of these resources.” „
3. Strategy means deciding upon the goals of the enterprise and then carving out a plan to achieve those goals.
4. They are a useful framework for guiding enterprise thinking and action.
5. Chandler defines strategy as, “the determination of the basic long term goals and objectives of an enterprise and the adoption of courses of action and the allocation of resources necessary to carry out these goals.”

→ Steps Involved in Planning
Establishing Objectives:
Objective must be understandable & rational to make planning ‘ effective.

• The first and foremost step in planning is deciding the objectives of ihe enterprise.
• This means deciding what is to be done, the activities or results to be accomplished, the rules procedures or policies to be laid down.
• Objectives of the enterprise must be very clear so as to enable easy achievement of goals.

→  Premising:
1. Premises means the assumptions or future setting within which the planning takes place. Planning is always done for the future and thus assumptions are required because there is no certainty about the activities that will take place in future. All assumptions are not premises.

2. Selection of premises involves skills and experience of the people involved.

3. Premises are not always same for all the industries.

4. (a) Premises can be internal or eyWnal to the firm. Internal premises may include sale forecast, capita! investment or programmes and policies that has been laid down by the management, External premises can be categorised as socio-economic, product market and factor market. Possible to quantify into rupee term.

(b) Premises can also be tangible or intangible. An example of intangible premises is goodwill of a company. An e.g. of tangible premises is when it is possible to quantify in terms of rupee.

(c) The other type of premises are controllable, uncontrollable and semi controllable.

Controllable prem Eses are already pre-decided by the management. Whereas uncontrollable premises are absolutely beyond the control of enterprise and prermses that can be modulated and controlled are semi-controllable.

→ Determining Alternative Courses:
Alternative courses of action must always be identified so that the management can resort to these alternatives in case the planning fails due to unforeseen circumstances.

→ Evaluation of Alternatives:

• In case more than one alternatives are available, the manager must evaluate all the alternatives on the basis of their strong or weak points and considering the other factors involved.
• This evaluation is a must to arrive at a decision.

→ Selecting a Course of Action:
This step involves choosing the best alternative from amongst those available.

→ Formulating Derivative Plan:

• To give effect to and make the final plan work a derivative plan is required.
• Every manager and department should contribute to the accomplishment of final plan on the basis of derivative plans.

→ Numbering Plans by Budgeting:
Plans should be made workable by allotting them their respective values by converting them into budgets.
Thus, the process of planning can be divided into 3 stages premising, forecasting and decision-making.

→ Factors influencing Goal Commitment

• Effective use of goals requires getting individuals and or workgroups to be committed to goals they must carry out.
• It is one’s attachment to, or determination to reach a goal.

→ Supervisory Authority:

• Goals may be assigned by supervisor who explains the reasons for the goals to the staff and gives needed instructions.
• A supportive supervisor will be more effective than an authoritative one.
• A supervisor must encourage and offer opportunities,

→ Peer and Group Pressure

• This builds goal commitment by focusing everyone’s efforts.
• Successful individuals act as role models but if goals are seen as unfair, peer and group pressure can cut goal commitments.

→ Public Display
Commitment may be greater too difficult goals with public commitment rather than private.

→ Expectations of Success

1. It individuals have high expectations of success then they might be more committed.
2. If they think they cannot accomplish the tasks, commitment to the goal is less likely.

→ Incentives and Rewards:

• During goal setting, incentives may be offered.
• Incentives are of two types-tangible and intangible.

→ Tangible – money.
Intangible – Job challenge and recognition of goal achievement.
Positive outcomes may foster commitment but negative ones may inhibit commitment.

→ Participation

• Where the individual participates in goal setting, commitment will be stronger.
• Participation aids in plan development for goal implementation.

Managers should include subordinate in goal setting and then in planning how to achieve those goals.

→ Planning Period:

• Plan can be made either for long-range or intermediate-range or short range.
• The planning period should be such that involves flexibility in the plan.
• Short-range plans must not be made in a haste or depending upon the current situation. They should always be made keeping in mind the long-range plans.
• Promoting on novation: The role of planning process.
• Potential obstacles to planning.
• Overcoming obstacles to planning.
• “Commitment Principle implies that long-range plans are not really for future but for the future impact of today’s decision.”
• Commitment principle considered in the light of ‘flexibility principle’ of planning. Which means plans must have an ability to change direction.
• A manager periodically checks on events and expectations and redraws plans as necessary to maintain a course towards a desired goal, is called principle of navigational change.

→ Promoting Innovation: The role of planning process

• An organisations view of innovation may come from the highest levels.
• The CEO sees a future based on innovation and will communicate this to organisation members.
• Goals can encourage innovation by having new ideas incorporated into goals.
• Plans can also achieve goals by using innovative means in order to achieve stated goals.

→ Potential obstacles to Planning:

• A rapidly changing environment may make planning harder.
• Some manager may not believe in planning at all.
• The manager’s daiiy work schedule pressures may distract from planning.
• Some managers have poor planning knowledge and skills.
• There may be low managerial involvement which may reduce effective planning.

→ Overcoming obstacles to Planning

• Have top management shown strong support for the planning process.
• Have lower-level managers engaged in and supported planning.
• Increase training of staff in how to develop plans.
• Managers should review plans often.
• Managers should develop contingency plan.

→ Decisions lie at the core of planning
The plans should be as flexible as possible. The more flexible is the, plan lesser will be the danger of losses to be incurred due to unforeseen events. This is also called the ‘Principle of navigational change.

→ Concept of forecasting:

• It means identifying and defining the conditions in future which will help in planning the work in the present.
• It may be comprehensive or limited in scope. Since forecasting always involves some amount of guesswork, managers preparing such forecasts must-have skill and experience.

→ Steps in Forecasting:
IdentIfying end Developing the Structure:
It involves the following steps:

• Identity strategic factors that are important for the forecast.
• Analyse internal and external factors and relations between them.
• Analyse the trend of each of such factors.

→ Forecasting Future Course of Business:

• Statistical and other mathematical techniques are used for protecting future business.
• The experience, clairvoyance and participation of management are important determinants of the quality of forecast.

→  Analysis of Deviations:

• The actual resuhs should be analysed along with the differences with the forecasted one.
• The reason for the deviation Is then analysed and corrective action is taken for future forecasting.

→ Improving the Existing Forecasting Procedure;
Guesswork should be gradually reduced and substituted by rational judgement and systematic analysis. Skill in forecasting is largely gained through experience and practice.

• Plans the synthesis of various forecasts-annual, short-term, long-term
• It helps the management to arrive at a correct decision.
• It helps the management to use better control techniques by focusing on areas where there is less control.
• It facilitates team spirit in the organisation which helps planning and coordination.
• It prepares the management to handle a critical situation that wasn’t expected.
• Fayol referred to planning as synthesis of various forecasts annual, long term, short term, special etc.

Forecasts are based on postulations and assumptions and as such, are subject to sanie amount of guesswork.
PossIbility of error cannot be completely eliminated from forecasts.

→ Concept of Decision Making:

• DecIsion-making permeates planning, organizing, controlling and all other functions of management.
• It involves selection of the best course of action from those available,
• It is one of the most Important functions of management since entire success or failure of the enterprise depends upon Its decision.
• It is because of this reason, decision should be based on a careful study of the facts available.

Decision-making as a rational process should be based on systematic analysis of all pertinent facts and not guided by intuitions.

→ Principles of Decision Making:
Principle of Definition:
1. It involves the basic fact that a problem well defined Is half solved.
2. A good description of problem reduces managers time and effort to find a correct decision.

→ Principle of Evidence:
Since decision making is one of the most important aspect of an organisation, it must be backed by concrete working papers and documents which serve as an evidence. Decision should not be taken hastily.

→  Principle of Identity:

• A situation is viewed differently by different people.
• Therefore, before taking a decision views of all the people along with the time period when such situation occurred should also be considered.
• This will help in better understanding of the problem and making quality decisions.

→ Decision-Making Conditions:
The 3 possible conditions are:

Certainty:

• This arises when the decision-maker knows exactly what will happen.
• Under this situation, the manager exactly knows the outcome because of the certainty involved in taking the decision.

Risk:

• This condition is most common and widely prevails in most of the organisations.
• Under this situation, only a part of the information is available and hence the decision-maker has to make an estimate of the outcome.
• This estimate is based on his past experience of the same situation.
• To enable managerial success in taking decision. There should always be some amount of risk-taking ability.
• If probability estimates are assigned to expected outcomes on the basis of past experience, it is known as objective probability.
• If the probability estimates are assigned on the basis of how an individual feels about, the problem (gut feel) then it is called subjective probability.
• Decision-makers could be risk takers or risk avengers.

Uncertainty:

• Under this situation, the decision-maker cannot estimate the outcome of various alternatives.
• Here the outcome is uncertain, hence decision making is difficult.

Steps in Decision Making
Identifying and Diagnosing the Real Problem:

• Past acts and decisions, predetermined objectives and environmental considerations provide the structure for current decisions.
• Manager must know the gap between what exists and what is expected to happen.
• Identifying the reasons for the gap and understanding the problem results in higher achievement of objectives.

→  Discovery of Alternatives:

• Manager should search for the alternatives that would help him in making decisions.
• Only the key factors or factors critical .for the decision should be considered.
• It also has principle of limiting factor, i.e. management should limit itself to the discovery of those key factors which are critical or strategic to the decision involved.
• It is described as a search of strategic factor.

Decision-making as a rational process should be based on systematic analysis of all pertinent facts and not guided by intuitions.

→ Principles of Decision Making
Principle of Definition:
1. It involves the basic fact that a problem well defined is half solved.
2. A good description of problem reduces manager’s time and effort to find a correct decision.

Principle of Evidence:
Since decision making is one of the most important aspect of an organisation, it must be backed by concrete working papers and documents which serve as an evidence. Decision should not be taken hastily.

→ Principle of Identity:

• A situation is viewed differently by different people.
• Therefore, before taking a decision views of all the people along with the time period when such situation occurred should also be considered.
• This will help in better understanding of the problem and making quality decisions.

→ Decision-Making Conditions:
The 3 possible conditions are:
Certainty:
1. ThIs arises when the decision-maker knows exactly what will happen.
2. Under this situation the manager exactly knows the outcome because of the certainty involved in taking the decision.

• Risk:
• This condition is most common and widely prevails Fri most of the organisations.
• Under this situation, only a part of the information is available and hence the decision-maker has to make an estimate of the outcome.
• ThIs estimate ¡s based on his past experience of the same situation.
• To enable managerial success in taking decisions. There should always be some amount of risk-taking ability.
• If probability estimates are assigned to expected outcomes on the basis of past experience, it is known as objective probability.
• If the probability estimates are assigned on the basis of how an individual feels about the problem (gut feel) then it is called subjective probability.
• Decision-makers could be risk takers or risk avengers.

Uncertainty:
1. Under this situation, the decision-maker cannot estimate the outcome of various alternatives.
2. Here the outcome is uncertain, hence decision making is difficult.

→ Steps In Decision Making
identifying and Diagnosing the Real Problem:

• Past ats and decisions, predetermined objectives and environmental considerations provide the structure for current decisions.
• Manager must know the gap between what exists and what is expected to happen.
• Identifying the reasons for the gap and understanding the problem results In higher achievement of objectives.

→  Discovery of Alternatives:

• Manager should search for the alternatives that would help him in making decisions.
• Only the key factors or factors critical for the decision should be considered.
• It also has principle of limiting factor, i.e. management should limit itself to the discovery of those key factors which are critical or strategic to the decision involved.
• It is described as a search of strategic factor.

→ Analysis and Evaluation of Available Alternatives:

• Once all the alternatives have been identified, the next step is the selection of the best alternative.
• Management should consider the risk involved in choosing amongst the available alternatives.
• Both tangible and intangible factors must also be considered. For e.g.- profit, time, money, public relations, morale etc.
• The techniques of. marginal analysis can be used for the evaluation of alternatives.
• Alternatives should be selected on the basis of cost-effectiveness.

→ Selection of Alternative to be followed:
(a) This is mainly done on the basis of past experience. But changes in the circumstances must always be kept in mind, before taking a decision in the present situation.

(b) Selection on the basis of experiments: Experimentation as the basis for final decision has the advantage of incorporating intangible factors and also the environmental changes. But it is the most expensive of the techniques.

(c) Research as the basis for decision: A number of research approaches and techniques have been developed which are contributing to the research as the basis for decision. Break-even analysis, marginal contribution analysis, forecasting, capital budgeting, standard costing, sensitivity analysis, operations research etc. are currently in use in the field of decision making.

→ Communication of Decision:
(a) Management should take into account the attitude and prejudices of the people in the organisation.

Hierarchy of Decisions:
The manager should determine the importance of each decision in forms of its commitment, scope and risk involved.
Less important decision can be based on simple analysis whereas important decisions must be made after a thorough analysis of all the related factors.

Nature of Management and its Process MCQ Questions

1 ……………….. is deciding in advance the course of action to be followed.
(a) Organising
(b) Direction
(c) Controlling
(d) Planning
(d) Planning

2. ……………….. represents the end point of planning.
(a) Goals
(b) Strategies
(c) Objectives
(d) None of the above
(c) Objectives

3. Strategic plans target …………………. but provide a brief guidance on how to achieve them.
(a) External goals
(b) Internal goals
(c) Organisational objectives
(d) None of the above.
(b) Internal goals

4. …………………. reflects belief and philosophy of management.
(a) Objectives
(b) Purposes/Mission
(c) Goals
(d) Rules
(b) Purposes/Mission

5. Which qualities should a person possess while planning?
(a) Reflective thinking
(b) Imagination
(c) Farsightedness
(d) All of the above.
(d) All of the above.

6. Only economists & technicians employed by the management as staff experts are involved in making forecasts.
(a) True
(b) False
(c) Partly True
(d) Partly False.
(b) False

7. Policies must be rigid and should not allow discretion on the part of subordinates.
(a) True
(b) False
(c) Partly True
(d) Partly False
(b) False

8. ……………….. specifies the manner of doing work, i.e. sequence for handling future activities.
(a) Rules
(b) Method
(c) Procedures
(d) Programme.
(c) Procedures

9. Which amongst the following is rigid and specific & cannot be changed?
(a) Methods
(b) Procedures
(c) Policies
(d) Rules.
(d) Rules.

10. ……………………. is supported by capital revenue & expense budgets.
(a) Programme
(b) Strategy
(c) Goals
(d) Policies.
(a) Programme

11. Method of evaluation of various alternatives are:
(a) Basis of cost-effectiveness
(b) Marginal analysis
(c) Risk involved and resources available
(d) All of the above
(d) All of the above

12. Second step of planning process is the establishment of:
(a) Planning premises
(b) Objectives
(c) Goals to be achieved
(d) All of the above
(a) Planning premises

13. Planning Premises can be …….. .
(a) Internal
(b) External
(c) Tangible
(d) All of the above
(d) All of the above

14. Quality of forecasts depends upon:
(a) Experience
(b) Clairvoyance
(c) Participation of management
(d) All of the above.
(d) All of the above.

15. The possible condition for decision making would be:
(a) Certainty
(b) Risk
(c) Uncertainty
(d) All of the above.
(d) All of the above.

16. While planning for expansion ……………….. might be the limiting factor.
(a) Availability of finance
(b) Availability of trained staff
(c) Both (a) & (b)
(d) None of the above
(c) Both (a) & (b)

17. Certainty, risk and uncertainty are the three possible conditions of:
(a) Decision making
(b) Planning
(c) Risk management
(d) None of these.
(a) Decision making

18. Planning provides for the future.
(a) Managerial tools
(b) Goals
(c) Strategic Plans
(a) Managerial tools

19. Planning is fully reliable.
(a) True
(b) False
(c) Can’t say
(d) None of the above
(b) False

20. Government rules and regulations are constraints,
(a) External
(b) Organisational
(c) Internal
(d) All of the above
(a) External

21. ……………………… helps the managers during the decision making process.
(a) Budget
(b) Strategies
(c) Programme
(d) Policies
(d) Policies

22. Every manager has the power to make policies but within the limits of his authority.
(a) False
(b) True
(c) Partly True
(d) Partly False
(b) True

23. …………………….. helps the management to arrive at a correct decision.
(a) Planning
(b) Forecasting
(c) Decision Making
(d) Experience
(b) Forecasting

24. Which of the following are Principles of Decision making?
(a) Principle of definition
(b) Principle of evidence
(c) Principle of Identity
(d) All of the above
(d) All of the above

25. …………….. arises when the decision-maker knows exactly what will happen.
(a) Risk
(b) Certainty
(c) Uncertainty
(d) Both (a) and (b)
(b) Certainty

26. “Planning is the selecting and relating of fact.? and the making and using of assumption regarding the future in the visualization and formulation of proposed activities believed necessary to achieve desired results”. This is given by:
(a) Philip Kotler
(c) Kasts & Rosenzweig
(d) George R. Terry
(d) George R. Terry

27. Which one is not a feature of Planning?
(a) Planning is Positive
(b) Primary Function
(c) Intellectual Process
(d) Pervasive Function
(d) George R. Terry

28. Which one of the following is not an importance of Planning?
(a) Planning makes personal conscious of enterprise objectives.
(b) Planning proceeds direction.
(c) Planning leads to economy in operation.
(d) None of the above.
(b) Planning proceeds direction.

29. Which function of management cannot exist without planning?
(a) Organising
(b) Directing
(c) Controlling
(d) Staffing
(c) Controlling

30. Which one of the following is not the limitation of planning?
(a) Rapidity of changesets another limit to planning
(b) Planning premise may not be fully reliable.
(c) Procedural and policy rigidities also come in the way of planning.
(d) Planning is applicable in every level.
(d) Planning is applicable in every level.

31. Which type of plan describes the goals of an internal organization, a working group or a department?
(a) Project Plans
(b) Strategic Plans
(c) Operational Plans
(d) Marketing Plans
(c) Operational Plans

32. Which of the following is a formal statement of business plans?
(b) The reason why they are believed attainable
(c) The plan for reaching those goals
(d) All of the above.
(d) All of the above.

33. Objective can be:
(a) Individualistic or collective
(b) Short-term or long term
(c) Tangible or Intangible
(d) All of the above
(d) All of the above

34. Which one signify some kind of regulation, positive or negative & permit no discretion in its application?
(a) Procedures
(b) Rules
(c) Strategy
(d) Methods
(b) Rules

35. Who defines strategies as “the process of deciding on objectives of the organization, on changes in these objectives, on the resources used to attain these objectives and on the policies that are to govern the acquisition, use and disposition of these resources”.
(a) Chandler
(c) Anthony
(d) None of these
(c) Anthony

36. Which is a complex structure of policies, procedures, methods, rules, budgets & other assignments?
(a) Strategy
(b) Programme
(c) Both (a) and (b)
(d) None of these
(b) Programme

37. ‘TDCI’ Stands for:
(a) Technological Development Corporation of India.
(b) Trade Development Corporation of India.
(c) Tourism Development Corporation of India
(d) None of these.
(c) Tourism Development Corporation of India

38. What is the duration of Planning Period?
(a) Long-range
(b) Intermediate-range
(c) Short-range
(d) All of the above.
(d) All of the above.

39. Forecasting is done by which level of management?
(a) Top level
(b) Middle level
(c) Lower level
(d) None of these
(a) Top level

40. Which of the following is the ‘Decision Making Condition’.
(a) Certainty
(b) Uncertainty
(c) Risk
(d) All of the above.
(d) All of the above.

41. According to George R. Terry is the selecting & relating of facts.
(a) Organising
(b) Directing
(c) Controlling
(d) Planning
(d) Planning

42. Planning is a mental work and includes …………………. on the basis of estimates available.
(a) Looking
(b) Forecasting
(c) Direction
(d) Controlling
(b) Forecasting

43. The first stage in Planning is the deliberate statement of ……………….. .
(a) Organization
(b) Objectives
(c) Direction
(d) Controlling
(b) Objectives

44. Planning is always done on the basis of
(a) Instability
(b) Mental work
(c) Predictions
(d) Goals
(c) Predictions

45. Types of plans are:
(a) Two
(b) Four
(c) Eight
(d) Five
(d) Five

46. Plans defines the working goals of an International organization,
(a) Operational
(b) Marketing
(c) Project
(a) Operational

47. Plans which identify & target internal goals.
(a) Project
(b) Marketing
(c) Strategic
(d) Operational
(c) Strategic

48. They are statement of expected revenue or losses of the organisation,
(a) Programme
(b) Budget
(c) Policies
(d) Strategy
(b) Budget

49. Who defines a strategy as “adaption of courses of action & allocation of resources necessary to carry out these goals”.
(a) Anthony
(b) George R. Terry
(d) Chandler
(d) Chandler

50. ………………… Premises are those that are largely decided by company management.
(a) Controllable
(b) Uncontrollable
(c) Semi controllable
(d) All of these
(a) Controllable

51. …………….. is a must to arrive at a decision.
(a) Evaluation of Alternatives
(b) Determining Alternative Courses
(c) Premising
(d) Objective
(a) Evaluation of Alternatives

52. It means identifying & defining the condition in future which will help in planning.
(a) Objective
(b) Controlling
(c) Forecasting
(d) All of these
(c) Forecasting

53. What are not the advantages of forecasting.
(a) It helps the Management to arrive at correct decision
(b) It helps the Management to use better techniques
(c) It. increases the guess-work
(d) It facilitates team spirit in organization.
(c) It increases the guess-work

54. Who referred to Planning as “synthesis of various forecasts”.
(a) Fayol
(b) Chandler
(c) George R. Terry
(d) Anthony
(a) Fayol

55. Discovery of limiting factors is important to the process of
(a) Identifying
(b) Decision making
(c) Diagnosing
(d) Managing
(b) Decision making

56. Research techniques currently used in decision making is-
(a) Forecasting
(b) Standard costing
(c) Capital budgeting
(d) All of these
(d) All of these

57. While planning for expansion, might be the limiting factor.
(a) Availability of finance
(b) Availability of trained staff
(c) Both (a) & (b)
(d) None of above
(c) Both (a) & (b)

58. Example of decision making by group is:
(a) Conferences
(b) Committees
(c) Office meeting
(d) All of these
(d) All of these

59. Disadvantage of decision making by groups:
(a) Improves the quality of decisions
(b) Many member evade their individual responsibility
(c) It is a time-consuming affair
(d) Both (b) & (c)
(d) Both (b) & (c)

60. Quality of Decisions will be better if the variables are:
(a) Unquantifiable
(b) Ambiguous
(c) Certain
(d) Quantifiable
(d) Quantifiable

61. Which qualities should a person possess to succeed in planning.
(a) Reflective thinking
(b) Imagination
(c) Farsightedness
(d) All of the above.
(d) All of the above.

62. Strategies show a direction.
(a) Undefined
(b) Well defined
(c) Unified
(d) Parallel
(c) Unified

63. ………………… refers to outline of plans of work to be carried out in a pfopei sequence.
(a) Programme
(b) Budget
(c) Organising
(d) None of these
(a) Programme

64. Programme is a complex structure of:
(a) Rules
(b) Budget
(c) Methods
(d) All of these
(d) All of these

65. Budget may be expressed in:
(a) Non-materials
(b) Money
(c) Numerical expression
(d) Both (b) & (c)
(d) Both (b) & (c)

66. These are business plans that have changes in perception and branding as their primary goal.
(a) Marketing
(b) Project
(c) Operational
(d) Strategic
(a) Marketing

67. Management is a process.
(a) Static
(b) Dynamic
(c) Both (a) & (b)
(d) None of these
(b) Dynamic

68. Which of these contribute to accomplishment of group goals.
(a) Staffing
(b) Direction
(c) Control
(d) All of these
(d) All of these

69. After plans are set, the final step to give them meaning is to numberise them by.
(a) Procedures
(b) Budget
(c) Planning
(d) Rules
(b) Budget

70. Forecasts may be:
(a) Comprehensive
(b) Unlimited
(c) Limited
(d) Both(a) & (c)
(d) Both(a) & (c)

71. Possibility of error cannot be completely eliminated from
(a) Planning
(b) Forecasts
(c) Organising
(d) All of these
(d) All of these

72. Which one of the following reflects the belief and philosophy of management in an organisation?
(a) Vision
(b) Mission
(c) Objectives
(d) Goals.
(b) The mission of a business is the fundamental unique purpose that sets it apart from other enterprises of its type and identifies the scope of its operations in terms of product and market. The mission is a general enduring statement of the intent of business. It reflects the belief and philosophy of management.

73. In an organisation, policymaking is the function of:
(a) Management
(c) Personnel Management
(d) Government.
(b) In an organisation, admInistration is concerned with policy-making whereas management with policy implementation.

74. ………………… is a primary function.
(a) Controlling
(b) Planning
(c) Co-ordination
(d) Organisation.
(b) Planning is an all-pervasive and a primary funchon of management. No manager, irrespective of the position In the organisation can do without it. However, planning ¡s subject to certain limitations and proper understanding of them will go a long way in improving efficiency of planning.

75. Which one of the following deals with future and involves forecasting?
(a) Planning
(b) Organising
(c) Controlling
(a) Planning deals with future and involves forecasting. A manager does not plan about the past though in his planning for future he is also guided by past performance. Since planning relates activities of the enterprise to its future environment, it requires projecting future activities of the organisation.

76. Premises signify …………….. within which planning will take place.
(a) Planning assumptions
(b) Planning deviations
(c) Planning resources
(d) None of the above.
(a) Premises signify planning assumptions within which planning will take place.

77. Which one of the following is the first and primary step in the planning process?
(a) Premising,
(b) Determining alternative courses,
(c) Evaluating alternatives
(d) Establishing objectives.
(d) The first and primary step in planning process is the establishment of planning objectives or goals. Definite objectives, in fact, speak categorically about what is to be done, where to place the initial emphasis and things to be accomplished by the network of policies, procedures, budgets and programmes, the lack of which would invariably result in either faulty or ineffective planning.

78. Planning may call for a change in the existing –
(a) Accounting Concepts
(b) Government Mandates
(c) Governance Standards
(d) Procedures and Policies.
(d) Procedures, rules and policies once established are difficult to change. But on the other hand, planning may call for a change in the existing procedures and policies.

79. Budget preparation is primarily a planning process whereas its administration is a part of –
(a) Implementation
(b) Controlling
(c) Payments
(d) Approval process.
(b) Budget is an important control device. It is often thought of in connection with controlling alone. However, budget-making is primarily a planning process whereas its administration is a part of controlling.

80. Which of the following is incorrect about strategy?
(a) It helps in competitive market
(b) It is innovative
(c) It is creative
(d) It gives long-term process guarantee.
(d) Strategy helps us to enter in the competitive market, it is innovative, it is creative but it doesn’t give guarantee for long-term process as in long-term strategy requires changes with change in conditions.

81. ………………… is a single-use plan containing expected results is numerical terms.
(a) Procedures
(b) Methods
(c) Rules
(d) Budget.
(d) Budget is a single-use plan containing expected results in numerical terms. They are statements of expected revenue or losses of the organisation in numerical terms.

82. It is the general enduring statement of the extent of business –
(a) Objectives
(b) Policies
(c) Mission
(d) None of the above.
(c) Mission is a general enduring statement of the intent of business. It reflects the belief and philosophy of management. It is the unique purpose that sets if apart from other enterprises and identifies the scope of its operations.

83. Discovery of is important to the process of decision making.
(a) Unlimited factors
(b) Co-ordination
(c) Integrity
(d) Limited factors.
(d) Discovery of Limited factor is important to the process of decision making, that its management should limit itself to the discovery of those key factors which are critical or strategic to the decision involved.

84. “Planning reconcile their resources opportunities” is given by –
(a) Chester I Barnard
(b) George R Terry
(c) Philip Kotler
(d) Peter. F. Drucker
(c) According to Philip Kotler: “Planning means deciding in the present what to do in the future. It is the process whereby companies reconcile their resources with their objectives and opportunities”.

85. Strategy was primarily used in:
(a) Military Science
(b) Practical Science
(c) Political Science
(d) None of these
(a) Strategy is a term very popular in military science. It refers to meeting the enemy under conditions advantageous to one’s own.

86. Which of the following is a single-use plan containing expected results in numerical terms?
(a) Budget
(b) Policies
(c) Procedures
(d) Rules.
(a) Budget is a single-use plan. They are statements of expected revenue or losses of the organisation in numerical terms.

87. The process of decision making involves several steps that can be divided into distinct categories. The solution phase involves
(a) Acquiring information
(b) Diagnosing the factors affecting the problem or opportunity
(c) Identifying a problem or opportunity
(d) Implementing the decided course of action.
(d) The process of decision making involves several steps:

• Acquiring Information about the problems.
• Identifying a problem or opportunity.
• Diagnosing the factors affecting the problem or opportunity.
• Discovery of Alternatives.
• Analysis and Evaluation of Alternatives.
• Selection of the Best Alternatives.

So, the solution phase involves implementing the decided course of action.

88. Decisions that have long-term perspectives of two to five years and affect the entire organisation are:
(a) Programmed decisions
(b) Tactical decisions
(c) Strategic decisions
(d) Operational decisions.
(c) Strategic decisions have long term perspective of two to five years and affect the entire organisation.

89. In the organisation ………………. has both short term and long term:
(a) Vision
(b) Mission
(c) Objective
(d) None of the above.
(c) The first important task of planning is to lay down objectives or goals. Objectives represent the end towards which not only planning but all other activities of management are directed. Objectives can be individualistic or collective: Short term or long term, tangible or intangible, general or specific.

90. What is the main function of management?
(a) Planning
(b) Organizing
(c) Staffing
(d) Controlling
(a) Planning is an all-pervasive and fundamental function of management. All other functions of organizing, staffing, directing and controlling must reflect planning function of management. Thus, planning is the main function of management.

91. It involves looking ahead and projecting the future course of events:
(a) Organizing
(b) Forecasting
(c) Controlling
(d) Co-ordination
(b) Forecasting may be defined as analysis and interpretation of the future conditions in relation to operation of the enterprise. It involves looking ahead and projecting the future course of events.

92. Out of the given option, the final step in the decision-making process is:
(a) Choosing best alternatives among a set of alternatives ‘
(b) Identifying problems
(c) Resolving problems
(d) Deciding alternatives for a problem.
(c) The final step in the decision-making process is resolving problem and thereby communicating of decisions and its acceptance by the organísatiofl after identifying the problem, deciding alternatives for problems, choosing best alternative among a set of alternatives.

93. By Planning premises we refer to:
(a) Guide to thinking in decision making
(b) A single operation of one particular step and specifies how this step is to be followed.
(c) The exact manner in which a particular activity is to be done
(d) The forecasting and assumption about the future.
(d) Planning premises signifies planning assumptions or future setting within which planning will take place. The very nature of planning requires that some assumptions be made regarding future happenings.

94. When the availability of each alternative and its outcomes are associated with probability estimates, decisions are being made under a condition of:
(a) Uncertainty
(b) Risk
(c) Certainty
(d) Conflict.
(c) The final step in the decision-making process is resolving problem and thereby communicating of decisions and its acceptance by the organisation after identifying the problem, deciding alternatives for problems, choosing best alternative among a set of alternatives.

95. The most appropriate definition of a “Procedure” is:
(a) It suggests the exact manner in which a particular activity is to be done.
(b) It signifies some kind of regulation, positive or negative and permits no discretion in its application.
(c) It is a single-use plan containing expected results in numerical terms
(d) It involves a single broad guideline for decision making.
(d) Planning premises signifies planning assumptions or future settings within which planning will take place. The very nature of planning requires that some assumptions be made regarding future happenings.

96. Which of the following is not considered to be a part of the planning function of a manager?
(a) Mapping out strategy
(b) Motivating
(c) Making decisions
(d) Defining goals

97. When the availability of each alternative arid its outcomes are associated with probability estimates, decisions are being made under a condition
(a) Uncertainty
(b) Risk
(c) Certainty
(d) Conflict.
(b) Risk: Most of the managerial decisions are made under risk conditions, that is, some information is available but it is insufficient to answer all questions about the outcomes, so a decision-maker has to make probability estimates of these outcomes.

98. The most appropriate definition of a procedure M is:
(a) It suggests the exact manner In which a particular activity is to be done.
(b) It signifies some kind of regulation, positive or negative and permits no discretion in its application.
(c) It is a single-use plan containing expected results in numerical terms
(d) It involves a single broad guideline for decision making.
(a) Procedure suggest the exact manner in which a particular activity is to be done. It specifies the chronological sequence for handling future activities.

99. Which of the following is not considered to be a part of the planning function of a manager?
(a) Mapping out strategy
(b) Motivating
(c) Making decisions
(d) Defining goals
(b) Planning function includes:

• Setting missions
• Laying objectives
• Mapping policies, procedures, methods & rules
• Budgets
• Programme
• Mapping Strategies

Thus, motivating is not a function of planning, it is a function of directing.

100. Which of the following is not an advantage of Decision making by groups?
(a) Decision making by group provides training to employees.
(b) Decision making by group is a time-consuming process.
(c) Decision made by group is widely accepted.
(d) Decision making by group improves the quality of decision making.
(b) Decision-making by groups is not a rare thing observed in business operations. Board meetings, committees, staff meetings and conferences provide examples of decisions-making by groups.

If properly handled, decision-making by groups or committees offers the following advantages:

• It improves quality of the decision since different viewpoints and opinions are reflected in it.
• Coordination of departmental activities through meetings of their respective heads become easier.
• Group decision-making provides opportunity for participation by individuals representing different interests and thus, it boosts their morale and motivates them for a wholehearted cooperation in carrying out the decisions.
• It provides opportunity for the training of employees and their development as future decision-makers.

101. Which of the following suggests the exact manner in which a particular activity is to be done?
(a) Procedures
(b) Budget
(c) Policies
(d) Strategy.
(a) Procedures suggest the exact manner in which a particular activity is to be done. It specifies the chronological sequence for handling future activities. An enterprise, for example, may have promotion policy based on seniority. To implement this policy, procedures must be established for calculating seniority of employees and granting them actual promotions. It is apparent, procedures are guide to actions.

102. The management function of control is largely a matter of …………. .
(a) Resolving conflicts
(b) Determining what needs to be done
(c) Enforcing rules for employees
(d) Monitoring to see that tasks are accomplished
(d) Management function of control seeks to check the performance against some predetermined standard or projected course of action established through planning process. Though planning affects all other functions of management, the unique feature of control is that it cannot exist without planning.

103. Which of the following best define the term planning:
(a) Integrated process to formulate the plans.
(b) Evaluate alternatives
(c) Devise the tools to manage an organisation
(d) Deciding upon the future course of actions to achieve the objectives of an organisation.
(d) Planning means deciding upon the future course of actions to achieve the objectives of organisation.

(a) Executive and governing
(b) Policymaking and implementation
(c) Legislative and determinative
(d) None of the above
(c) Planning / Functions of administration are legislative and determinative.

105. Which one of the following control techniques is associated with recording of expenses and comparing them with the budgeted cost?
(a) Internal Audit
(b) Standard costing
(c) Break-even analysis
(d) Statistical control
(b) Standard costing is one of the control techniques which is associated with recording of expenses and comparing them with budgeted cost.

106. Premises signify ………………….. within which planning will take place.
(a) Planning assumptions
(b) Planning deviations
(c) Planning resources
(d) None of the above.
(a) Planning will takes place in planning assumption signify by premises.

107. How many principles of management have been suggested by Henry Fayol?
(a) 10
(b)14
(c) 12
(d) 16
(b) There are 14 principles of Management suggested by Henry Fayol.

108. Which of the following is the first and primary step in the planning process?
(a) Premising
(b) Determining
(c) Evaluating alternatives
(d) Establishing objectives
(d) Planning process is very tedious process and it involves so many steps and its first step is to set objectives i.e. what to achieve. Without objective, nothing can be achieved by organisation. So, setting goals is the Primary Step of Planning Process.

109. Which one of the following method is used frequently by an organisation to decide its strategic goals?
(a) Group discussion
(b) Brainstorming
(c) Interview
(d) None of the above
(b) Brain Storming: Brainstorming is a group creativity technique by which efforts are made to find a conclusion for a specific problem by gathering a list of ideas spontaneously contributed by its members. Thus, option (b) is correct answer.

110. The term strategy is derived from:
(a) Strategos
(b) Strata
(c) Strategy
(d) All of the above
(a) Strategy is derived from a Greek word Strategos comprising two words Stratos + ago; respectively meaning army and moving or guiding.

111. Planning is a:
(a) One time process
(b) Continuous process
(c) Once in 10-year process
(d) None of these
(b)Planning is a continúous process of management.

112. Planning is
(a) Fixed
(b) Flexible
(c) Both (a) and (b)
(d) None of these
(b) Planning is flexible as it can be changed in accordance to current situation and can be redrafted.

113. Planning may call for a change in the existing —
(a) Accounting Concepts
(b) Government Mandates
(c) Governance Standards
(d) Procedure and Policies
(d) Planning may call for a change in the existing ‘Procedure and Policies’ of the organisation because all other three only affect the planning already done.

114. Strategic plans are required for plans?
(a) Long Range
(b) Short Range
(c) Medium Range
(d) All
(a) Strategic plans are detailed action steps laid out to achieve strategic goals. These have a time horizon 5 years and above. These plans often include their mission and goals as these are the basis for action steps.

115. Actual selection of course of action from among the alternative?
(a) Decision Making
(b) Forecasting
(c) Premises
(d) Budgeting
(a) Decision making signifies actual selection of a course of action from among a number of alternatives. It is so important to the job of managing that management is sometimes described as consisting essentially of the decision making process.

## Corporate Tax Planning And Tax Management – Advanced Tax Laws and Practice Important Questions

Question 1.
State with brief reason, whether the following relate to tax planning, tax avoidance, or tax evasion:

1. Setting up of a liaison office in India by a foreign company, instead of a full-fledged establishment to run its business activities in India.
2. Investment in bonds approved for purposes of section 54EC.
3. Businessman claiming depreciation on a refrigerator purchased for residential use.
4. Visiting a foreign country for a certain number of days to reduce the number of days of stay in India.
5. The assessee has two residential houses. He wants to sell a vacant site purchased 6 years back. To avail exemption under section 54F, he gifts a residential house to his major son.

(1) Setting up of a liaison office in India by a foreign company, instead of a full-fledged establishment to run its business activities in India is to reap the benefit of the DTAA instead of coming under the provisions of section 9 of the Income-tax Act, and thus is an act of Tax Planning.

(2) Investment in Bonds approved u/s 54EC will reduce tax liability relating to Capital Gains. It is an act of Tax Planning.

(3) Businessman claiming depreciation on a refrigerator purchased for residential use is an act of Tax Evasion because of wrongly claiming depreciation on personal assets by showing as business assets.

(4) Visiting a foreign country to reduce the number of days of stay in India is a measure of Tax avoidance with regard to residential status, which may have an impact on the taxability total income.

(5) Gifting a house property to a major son with a view to come within the eligibility norms of an exemption section is though legally permissible but is an act of Tax Avoidance.

Question 2.
State with reason, whether the following acts can be considered as an act of Tax Planning, Tax Management, Tax Avoidance or Tax Evasion:

1. Starting a business in an industrially backward State will entitle an assessee to claim a deduction under section 80-IB.
2. Transferring of assets to another person without adequate consideration.
3. Installation of Air Conditioner costing ₹ 75,000 at the residence of Director as per terms of appointment; but treating it as Plant installed in Quality Control Section in the factory.
4. Mr. D is a working partner in a firm and he is entitled to a salary of ₹ 30,000 per month. He treats this as salary instead of business income.
5. X&Y Ltd. maintains adequate records and registers of tax deducted at source by it to enable timely compliance of legal provisions.

(1) Starting a business in an industrially backward State which will entitle an assessee to claim a deduction is an act of Tax Planning because the incidence of tax is minimized using the exemptions/deduction provided in the Income Tax Act, 1961.

(2) Transferring assets to another person without adequate consideration is an act of Tax Avoidance because the element of mala fide motive is involved to avoid payment of tax.

(3) Installation of Air Conditioner costing ₹ 75000 at the residence of Director as per the terms of appointment but treating it as plant installed in Quality Control Section in the factory is an act of Tax Evasion because of suppression of fact. This is with the objective to treat factory assets for claiming depreciation to be deducted from business income.

(4) Tax Evasion because Mr. D tries to reduce his tax liability by misrepresenting the income as salary instead of business income, thereby claiming the standard deduction.

(5) X & Y maintain adequate records and registers of tax deducted at source by it to enable timely compliances of legal provisions is an Act of Tax Management because it involves compliance of law regularly.

It enables the company to manage the affairs of business efficiently for timely payment of tax and submission of returns.

Question 3.
Specify with brief reason, whether the following acts can be considered as an act of (i) Tax management; or (ii) Tax planning; or (iii) Tax
evasion; or (iv) Tax avoidance:

1. To reduce tax payable, Sunil Varma an individual, paid ₹ 55,000 as of life insurance premium on the policy of his minor son.
2. A foreign company has an Indian subsidiary that is selling its product to the parent company at a price of ₹ 100 per unit while the same product is sold to another foreign company at ₹ 200 per unit.
3. A company claiming depreciation on the motor car which is being used by director for personal purposes.

(1) Premium paid on the life insurance policy of minor son is allowed as deduction under section 80C of the Income-tax Act, 1961. Therefore,
₹ 55,000 paid, by Mr. Sunil Varma, as premium on the life insurance policy of his minor son is an act of Tax Planning.

(2) The transaction which is not at Arm’s Length Price ‘ALP’ is an act of Tax Avoidance. In this case, an Indian subsidiary, while selling its products, charging less amount from its foreign parent company and shifting profits to outside India in order to avoid tax liability in India and therefore is an act of Tax Avoidance as the transaction is not at arm’s length price.

(3) Claiming depreciation on the motor cars being used for personal purposes is not allowed under section 32 of the Income Tax Act, 1961. Therefore, the depreciation claimed by the company on the motor car which is being used by the director for personal purposes is an act of Tax Evasion.

Question 4.
Specify whether the following acts can be considered as (i) Tax planning, or (ii) Tax management, or (iii) Tax evasion.

1. P deposits ₹ 1,00,000 in Public Provident Fund (PPF) account so as to reduce his total income from ₹ 3,40,000 to ₹ 2,40,000.
2. SQL Ltd. maintains the register of tax deductions at the source affected by it to enable timely compliance.
3. An individual taxpayer making a tax saver fixed deposit of ₹ 1,00,000 in a nationalized bank.
4. A bank obtaining declaration from depositors in Form No. 15G/15H and forwarding the same to income-tax authorities.
5. Z debits his household expenses as business expenses in the books.

(1) Depositing an amount to the Public Provident Fund (PPF) in order to reduce the total income and tax liability is an act of Tax Planning. Therefore, a deposit of ₹ 1,00,000 in ‘PPF’ by P to reduce his total income from ₹ 3,40,000 to ₹ 2,40,000 is an act of Tax Planning.

(2) Maintenance of Register of Tax Deduction at Source to enable timely compliance is an act of Tax Management. Therefore, the maintenance of the TDS registers by SQL Ltd. to enable timely compliance is an act of Tax Management.

(3) Investment in tax saver fixed deposits is allowed as deduction u/s 80C of the Income Tax Act, 1961 and is an act of Tax Planning. Therefore, depositing ₹ 1,00,000 in tax saver fixed deposit by an individual taxpayer is an act of Tax Planning.

(4) Obtaining declaration from depositors by a bank in Form 15G/ 15H and forwarding the same to the Income Tax Authorities is an act of
Tax Management.

(5) Claiming the household expenses as business expenses in the books of account is not allowed as deduction u/s 37 of the Income Tax Act, 1961 and is an act of Tax Evasion. Therefore, the act of Z debiting his household expenses as business expenses is an act of Tax Evasion.

Question 5.
Specify whether the following acts can be considered as an act of Tax management, tax planning, or tax evasion.

1. Surbhi issues a credit note for ₹ 36,000 payable to Suresh, who is the son of Surjit, managing director of the company. The purpose is to increase his income from ₹ 1,00,000 to ₹ 1,36,000 and reduce his income correspondingly.
2. Z Ltd. deducts tax at source but fails to deposit the same in the Government treasury.
3. B transferred 1,000 debentures of a company to his son C before the due date of interest to reduce his tax liability.

1. Tax Evasion:
Surbhi Ltd. has issued a credit note to Suresh with a view to transferring part of its income to Suresh.
Suresh being an individual will be liable to tax at normal rates applicable to the individual, which, in this case, will be lower than the rate applicable to Surbhi Ltd. had such transfer of income not been affected, the income would have been taxed in hands of Surbhi Ltd. at a higher rate of 30%. Such an act is a model of tax evasion.

2. Improper Tax management:
In this case, the company will be liable to pay interest and penalty.

3. Tax Avoidance:
In this case, Mr. X wants to avoid his tax liability by transferring the debentures before the due date of interest to his son.

Question 6.
Distinguish between ‘tax planning’ and ‘tax avoidance.

 Tax Planning Tax Avoidance Tax planning is an act within the four corners of the tax laws. It is a means to avail the benefits legally permissible under the Act. It complies with the legal language of the law but not the spirit of the law. Tax planning is a permissible legal right that enables the taxpayer to maximize his return net of taxes. It refers to reducing the tax liability by finding out loopholes in the law. Tax planning has judicial approval. The concept can be considered heinous to tax evasion. Government brings amendments to curb such practices and to plug the loopholes. It does not result in a levy of penalty and prosecution as it is within the language and spirit of the law. It may result in disregarding the transaction done to avoid tax and may or may not result in penalties and prosecution against the person engaged in it. An individual who made the investment in PPF to claim deduction under section 80C is an example of tax planning. An asset transferred by one person to another person without consideration/ without adequate consideration may be treated as an example of tax avoidance.

Question 7.
Distinguish between ‘tax planning’ and ‘tax evasion ‘.

 Tax Planning Tax Evasion It is an act within four corners of tax laws. It is a means to avail benefits legally permissible. It is an attempt to avoid tax by misrepresentation of facts and falsification of accounts It is a permissible legal right that enables the taxpayer to maximize his return net of taxes. It is a legal offense that may lead to penalties and prosecution. It enables the assessee to have more cash flow in order to expand the business. It distorts the economy and results in black money generation. It is a professional exercise. It encourages bribery and weakens the economic and political situation of the country. It has judicial approval. It is denounced by courts as anti-social

Question 8.
Distinguish between “Diversion of Income and Application of Income”

 Diversion of Income Application of Income Income never reaches the assessee as his own income. By virtue of an obligation, the income is diverted at the source before it reaches the assessee. Income reaches the assessee as his own income and its subsequently applied to discharge an obligation. Here, the obligation is on the source of income. Here, the obligation is on the receipt of income i.e. after income reaches the assessee. There is an overriding title by virtue of which diversion of income takes place. There is no overriding title in this case. In case of diversion, the income is not included in the income of the assessee. In the case of application, income is included in the income of the assessee. Since the assessee does not have a title, income cannot be said to have accrued or arisen. Income is said to have accrued or aris-en and therefore is taxable in hands of the assessee.

Question 9.
Peer Ltd. took over the running business of a Ramu, a sole proprietor by a sale deed. As per the sale deed, Peer Ltd. undertook to pay overriding charges of ₹ 15,000 p.a. to Ramu’s wife in addition to the sale consideration. The sale deed also specifically mentioned that the amount was charged on the net profits of Peer Ltd., who had accepted that obligation as a condition of purchase of the going concern. Examine, in the light of decided case law that whether the payment of overriding charges by Peer Ltd. is in the nature of diversion of income or application of income.
The facts of the case are similar to that of the case Jit & Pal X-Rays (P.) Ltd. v. CIT(2004) 134 Taxman 62 (All), where the Allahabad High Court observed that the overriding charge which had been created in favor of the wife of the sole-proprietor was an integral part of the sale deed by which the going concern was transferred to the assessee. The obligation, therefore, was attached to the very source of income i.e. the going concern transferred to the assessee by the sale deed. The sale deed also specifically mentioned that the amount in question was charged on the net profits of the assessee-company and the assessee-company had accepted that obligation as a condition of purchase of the going concern. Hence, it is clearly a case of diversion of income by an overriding charge and not a mere application of income. Thus, the payment of overriding charges by Peer Ltd. to Ramu’s wife is a case of diversion of income and hence allowed to be deducted from Income of Peer Ltd.

Question 10.
Why is tax planning necessary?
Tax planning is necessary on account of the following reasons: –
1. The basic objective of tax planning is to reduce the incidence of tax in a legitimate manner. Because of a lack of awareness of the legal requirements, an assessee may not be in a position to take advantage of the various deductions and exemptions allowed under the tax laws.

2. An assessee has to acquire good knowledge of the tax laws and plan his affairs in such a way that he will be in a position to avail the various concessions admissible to them and thus reduce the tax liability to the maximum extent possible.

3. Tax planning also helps in the reduction of litigation which involves wast-age of valuable time and money.

4. Planning is very essential in choosing the areas where investments can be made. In order to encourage investments in certain areas, the Government provides various tax incentives.

5. Tax planning also results in an increase in profits which can legitimately be used for expanding business or setting up new ventures.

6. It facilitates taking of various managerial decisions such as whether to go for modernization and replacement of plant and machinery, buy or take assets on a lease, close or continue the business, etc. g. Tax planning is also necessary to meet the tax liability in time without affecting the financial condition of the taxpayers.

Question 11.
Examine the doctrine of form and substance in the context of tax planning?
The following are certain principles enunciated by the Courts on the question as to whether it is the form or substance of a transaction, which

1. will prevail in income-tax matters:
Form of the transaction is to be considered in case of genuine transactions – It is well settled that when a transaction is arranged in one form known to the law, it will attract tax liability whereas, if it is entered into in another form which is equally lawful, it may not. Therefore, in considering whether a transaction attracts tax or not, the form of transaction put through is to be considered and not the substance. However, this rule applies only to genuine transactions.

2. True Legal relation is a crucial element for taxability:
It is open for the authorities to pierce the corporate veil and look behind the legal facade at the reality of the transaction. The taxing authority is entitled j as well as bound to determine the true legal relation resulting from a j transaction. The true legal relationship arising from a transaction alone | determines the taxability of a receipt arising from the transaction.

3. Substance (i.e. actual nature of expenses) is relevant and not the form:
In order to determine whether a particular item of expenditure is of revenue or capital nature, the substance and not merely the form should be looked into.

Question 12.
Global Ltd. is a widely-held company engaged in power generation in Assam. At present, the company is having a capital of ₹ 10 crores in fully paid equity shares. The company is considering a proposal to increase its power generation capacity which will require ₹ 5 crores. The additional capital required can be raised either by the issue of fully paid equity shares or by the issue of 10% debentures. Directors of the company want to raise the funds through equity shares as the company can have fully owned capital. Will you accept the proposal at a 20% rate of return (pre-tax) and a 30% rate of tax? Give reasons in support of your answer.
Computation of Expected Rate of Return on Capital Employed Figures in ₹

 Particulars Proposal I Proposal II Issue of equity shares Issue of 10% Debentures Equity share capital 15,00,00,000 10,00,00,000 10% Debenture – 5,00,00,000 Therefore, Total Capital Employed 15,00,00,000 15,00,00,000 PBIT (Expected Rate of return on capital em-ployed @ 20%) 3,00,00,000 3,00,00,000 Less: Interest on Debentures at 10% – (50,00,000) Profit Before Tax (PBT) 3,00,00,000 2,50,00,000 Less: Tax @ 30% on PBT (90,00,000) (75,00,000) Profit After Tax (PAT) 2,10,00,000 1,75,00,000 Expected rate of return for shareholders 14% 17.50%

Decision:
The proposal of deriving additional capital by issuing fully paid-up equity shares is not acceptable as it will give a lesser rate of return to shareholders in the future. Therefore, it is beneficial to raise the additional funds through the issue of 10% debentures as it will increase the rate of return to shareholders from 14% to 17.50%.

Question 13.
Does a company want to raise capital of ₹ 40,00,000 for a project where earnings before tax would be 30% of the capital employed? The company can raise debt finance @ 12% p.a. The following three alternatives for raising capital are available for the company:

• ₹ 40,00,000 by equity capital
• ₹ 20,00,000 by equity capital and ₹ 20,00,000 by loans
• ₹ 8,00,000 by equity capital and ₹ 32,00,000 by answer:

Assume that the company would distribute the entire amount of profits as dividends. The tax rate is 31.20%. Work out which one of the above three alternatives should the company opt to minimize its tax liability?
Analysis of financing options to minimize the tax liability of the company Figures in ₹

 Particulars Alternative 1 Alternative 2 Alternative 3 Earnings Before Interest and Tax (40,00,000 × 30%) 12,00,000 12,00,000 12,00,000 Less: Interest – (2,40,000) (20,00,000 × 12%) (3,84,000) (32,00,000 × 12%) Earnings Before Tax 12,00,000 9,60,000 8,16,000 Less: Tax @ 31.20% (3,74,400) (2,99,520) (2,54,592) Earnings After Tax available for Equity Shareholders 8,25,600 6,60,480 5,61,408 Rate of return on equity share capital (e/Share Capital × 100) 20.64% 33.02% 70.18%

Decision:
Since Alternative 3 offers the maximum rate of return on equity share capital, the company should opt for Alternative 3.

Questions 14.
Ravi Glass Ltd., a widely held company is considering a major expansion of its activities for which an additional investment of ₹ 3 Crores is required. The company has the following three options/alternatives for the financing of the proposed additional investment of ₹ 3 crores:

• By issue of Equity shares and raise the equity share capital only.
• ₹ 2 crores from the issue of Equity shares and ₹ 1 crore by issue of 15% debentures.
• ₹ 1 crore from the issue of Equity shares, ₹ 1 crore from the issue of 15% debentures, and the remaining ₹ 1 crore by taking a bank loan on interest payable at 15% p.a.

The expected rate of return on the new investment has been worked out at 30%. The corporate rate of tax for the time being on the income is 31.20%. The company has proposed to declare the total net profits as dividends. You are required to suggest to the company which is the best alternative to be undertaken for the purpose of the proposed investment. Assume that no other taxes are being payable/to be charged on the distributed profits.
Computation of Expected rate of return on equity share capital: Figures in ₹

 Particulars Proposal I Issue of Equity shares only Proposal II Issue of Equity shares and 15% Debentures Proposal III Issue of Equity Shares, Bank loan @ 15% and 15% Debentures Earnings Before Interest and Tax (₹ 3,00,00,000 × 3096) 90,00,000 90,00,000 90,00,000 Less: Interest @ 15% on Debentures – (15,00,000) (₹ 1,00,00,000 × 15%) (15,00,000) (₹ 1,00,00,000 × 15%) Less: Interest on Bank Loan – – (15,00,000) (₹ 1,00,00,000 × 15%) Earnings Before Tax 90,00,000 75,00,000 60,00,000 Less: Tax @ 31.2% of EBT (28,08,000) (90,00,000 × 31.2%) (23,40,000) (75,00,000 × 31.2%) (18,72,000) (60,00,000 × 31.2%) Earnings After Tax 61,92,000 51,60,000 41,28,000 Expected rate of return on equity share capital (f / Equity Share Capital × 100) 20.64% 25.80% 41.28%

Decision/Conclusion:
The rate of return on equity is highest in the case of the third alternative. Therefore, the company should opt for the third alternative.

Question 15.
X Ltd. has a share capital of ₹ 60,00,000. For the expansion of business, it requires an additional ₹ 60,00,000. To finance the project, the company has three options:

• Issue of Equity shares only.
• Issue of equity shares of ₹ 30,00,000 and 12% debentures amounting to ₹ 30,00,000.
• Issue of equity shares of ₹ 15,00,000, issue of 12% debentures of ₹ 30,00,000, and the remaining amount from borrowings from the bank at 20% interest per annum.

Assuming that the expected rate of return is 25%, advise which alternative the company should opt to maximize the rate of return. The rate of tax is 31.20%.
Computation of Return on Equity share capital for X Ltd. Figures in ₹

 Particulars Alternative 1 Issue of equity shares only Alternative 2 Issue of equity shares and Debentures Alternative 3 Issue of equity shares, debentures, and borrowings from the bank Earnings Before Interest and Tax (₹ 1,20,00,000 × 25%) 30,00,000 30,00,000 30,00,000 Less: Interest – 3,60,000 (₹ 30,00,000 × 1296) 6,60,000 (30,00,000 × 12%) + (₹ 15,00,000 × 2096) Earnings After Tax 30,00,000 26,40,000 23,40,000 Less: Tax @ 31.20% 9,36,000 8,23,680 7,30,080 Earnings After Tax available to equity shareholders 20,64,000 18,16,320 16,09,920 Return on Equity share capital (c/Eq uity Share Capital × 100) 17.20% 20.18% 21.47%

Conclusion:
The company should opt for Alternative 3 as Return on equity share capital is highest under that option.

Questions 16.
A is employed with XYZ Ltd. His salary is ₹ 1,00,000 per month. He is also paid a house rent allowance of ₹ 20,000 per month. His wife B is also employed at a salary of ₹ 40,000 per month with ABC Ltd. where A holds 20% shares.

B does not hold adequate qualifications for the post which she is holding. B is the owner of a house that is self-occupied by the family. The house was constructed in the year 2018-19 with borrowed funds. Suggest a scheme for tax planning to minimize the tax liability for the financial year 2020-21. (Assessment Year 2021-22).
A is advised to reduce his shareholdings with XYZ Ltd. from 20% to 1 19% to avoid clubbing of salary income of B (A’s wife) u/s 64( 1 )(iv).

B should not treat the house as self-occupied. She should let it out to A and issue a rent receipt of an amount say ₹ 40,000 per month. On the basis of rent receipt, A is entitled to claim the exemption in respect of House Rent Allowance ‘HRA’ to reduce his tax liability. Besides, B can claim the exemption in respect of interest payable on housing loans.

Question 17.
Vijay is employed with Sunder Ltd., at a monthly salary of ₹ 45,000. He also receives ₹ 5,000 per month as a house rent allowance. he deposits ₹ 40,000 in the PPF account. He also pays ₹ 30,000 as tuition fees for his two children.

Vijay’s wife, Isha is employed with Chander Ltd., at a monthly salary of ₹ 25,000, where Vijay holds 21% of the shares of the company. Isha is not adequately qualified for the post held by her in Chander Ltd. Isha owns a house used as a self-occupied house by the family. The municipal value of the house is ₹ 3,60,000. It was constructed with borrowed funds in 2019-20. Interest on the loan is ₹ 1,80,000 p.a. Isha insured the house and paid an insurance premium of ₹ 8,000 to United India Insurance Company. She also paid ₹ 20,000 as municipal taxes.

Suggest a scheme of tax planning for both Vijay and Isha to minimize their tax liability during the financial year 2020-21.
Some of the Tax planning measures for Vijay and Isha could be:
(1) Vijay holds a substantial interest (2196) in Chander Ltd. where Isha holds a post for which she is not adequately qualified. Thus, the remuneration received by Isha would be clubbed in the income of Vijay. To avoid | this, Vijay may reduce his shareholding in Chander Ltd. to 1996.

(2) Vijay and Isha may request their respective employers to restructure their salaries, as follows:

• Restructure salaries to break up the monthly salary into basic pay, conveyance allowance/car facility, leave travel facility, medical reimbursement, and telephone reimbursement, etc. This will reduce the amount of taxable salary.
• There are several employees’ welfare schemes such as recognized provident fund, approved superannuation fund, gratuity fund. Payments made towards such schemes are eligible for deductions. So, Vijay and Isha may request their employer to include these welfare schemes and make contributions towards the same.

(3) Currently Isha is treating the house as self-occupied by the family; she may rent out this to Vijay against a rent receipt. This will enable Vijay in claiming the deduction for House Rent Allowance.

(4) Isha may claim the deduction for the principal amount and the interest amount paid for the funds borrowed for the construction of the house. For the principal amount, the deduction could be claimed for up to ₹ 1,50,000, and for interest, the amount deduction could be claimed up to ₹ 2,00,000.

Question 18.
A, B, and C are planning to start a retail business. The profits of the business for the year are estimated to be ₹ 20,00,000. Two alternatives are available to them regarding the selection of form of organization:

1. A Partnership Firm:

• Capital introduced by each partner: ₹ 20,00,000
• Interest on capital at 20%
• Salary ₹ 3,00,000 p.a. to each
• Profits are to be distributed equally.

2. A Company:

• Share Capital of ₹ 4,00,000 each.
• Loan of ₹ 16,00,000 by each @ 12%.
• Salary of ₹ 3,00,000 p.a. to each.
• Remaining profits are to be distributed equally as dividends Advise, which alternative is better from the tax point of view.

Alternative 1: Partnership Firm
Computation of tax outflow under this option:

 Particulars Amount (₹) Amount (₹) Profits as an estimate of the firm 20,00,000 Less: Interest on capital (₹ 20,00,000 × 12% × 3) 7,20,000 Book Profits 12,80,000 Less: Allowable Remuneration towards partners Lower of following 2:- Actual Remuneration towards working partners ₹ 3,00,000 × 3 partners) and; 9,00,000 Maximum Limit: ? 3,00,000 × 90% + Balance Book Profits × 60% = 2,70,000 + ₹ 5,88,000 8,58,000 Therefore, Allowable remuneration 8,58,000 Profits and Gains from Business or Profession/Total Income of firm 4,22,000 Tax Liability @30% 1,26,600 Add: Health and Education Cess @ 4% 5,064 1,31,664 Rounded off to nearest of ₹ 10u/s 288B 1,31,660 Partners Total Income (Each partner) Interest to the extent allowed in the firm (₹ 20,00,000 × 1296) 2,40,000 Salary (To the extent allowed in the firm) {₹ 8,58,000/3} 2,86,000 Share of profit from the firm {Fully Exempt u/s 10(2A) of Income Tax Act] – 5,26,000 Tax liability of each partner On an income of ₹ 2,50,000 – On ₹ 2,50,000 to ₹ 5,00,000, Tax@ 5% 12,500 On income between ₹ 5,00,000 to ₹ 10,00,000, Tax at 2096 (₹ 26,000 × 20%) 5,200 Sub Total 17,700 Add: Health and Education Cess @ 4% 708 Total Tax each partner 18,408 Rounded off to nearest of ₹ 10 u/s 288B 18,410 Therefore, Tax liability of 3 partners (₹ 18,410 × 3) 55,230 Therefore, Total Tax Outflow under this option (₹ 1,31,660 + ₹ 55,230) 1,86,890

Alternative 2: Company
Computation of Total tax outflow under this option:

 Particulars Amount(₹) Amount (₹) Profits as an estimate of the company 20,00,000 Less: Interest on Loan (₹ 16,00,000 × 12%) 5,76,000 Less: Salary (₹ 3,00,000 × 3) 9,00,000 Profits and Gains from Business or Profession/Total Income 5,24,000 Tax Liability at 25% 1,31,000 Add: Health and Education Cess @ 4% 5,240 Total Tax payable by the company 1,36,240 Profit After Tax Available for distribution as dividend (₹ 5,24,000 – 1,36,240) 3,87,760 Shareholders/Director’s Total Income (Each) Income from Salary 3,00,000 Less: Standard Deduction u/s 16(id) (50,000) Net Taxable Salary 2,50,000 Income from Other Sources: Interest on Loan (₹ 16,00,000 × 12%) 1,92,000 Dividend (₹ 3,87,760)/3 1,29,253 3,21,253 Total Income 5,71,253 Rounded off to nearest of ₹ 10u/s 288B 5,71,250 Tax liability of each partner: On an income of ₹ 2,50,000 – ₹ 2,50,000 to ₹ 5,00,000, Tax at 5% 12,500 On income between ₹ 5,00,000 to ₹ 10,00,000, Tax at 2096 (₹ 71,250 × 20%) 14,250 Sub-Total 25,750 Add: Health and Education Cess @ 4% 1,030 26,780 Therefore, Tax payable by 3 shareholders/directors (₹ 26,780 × 3) 80,340 Therefore, Total tax outflow (₹ 1,36,240 + ₹ 80,340) 2,16,580

Since overall tax outflow is less in the option of the firm than a company, it is advisable to start a new business in the form of a partnership firm.

Note:
Keeping in view amendments made by Finance Act, 2020 applicable w.e.f. A.Y. 2021-22 (Relevant to RY. 2020-21), Dividend is taxable in hands of recip¬ient i.e. shareholders & hence, it is included in the total income of shareholders and tax is calculated on total income as per normal slab rates applicable to individuals. There will be no implication of Dividend Distribution Tax (DDT) for dividends declared, paid, or distributed on or after 01.04.2020.

Further, it is assumed that the individual assessee has not opted for an alternative mechanism to compute tax as per section 115BAC of the Income Tax Act, hence normal rates of tax are applied.

Author’s Note:
In the view that ICSI is asking questions restricted to 5 marks only in recent exams, such lengthy questions may not be asked. However, it has been included here as any part of such question could be asked individually. Further, for conceptual clarity with respect to selection of the type of entity: Partnership Firm v/s Company the question is must be covered.

Questions 19.
From the following information, advice as to which shall be a better option, i.e., repair or replacement of machine:

• The cost of repair is ₹ 90,000 and the machine will work for 4 years.
• An expenditure of ₹ 18,00,000 shall be incurred on the purchase of a new machine and the scrap value of the machine after 10 years would be, ₹ 72,000.
• On purchase of the new machine, the production will increase and the profit of the organization will increase from ₹ 9,00,000 to ₹ 15,00,000 per year.
• The rate of interest is 15% (on purchase).
• The old machine can be sold at present for ₹ 1,50,000 and after 4 years it would be sold for ₹ 30,000.
• The rate of income tax is 30% and no surcharge is payable. Health & education cess is applicable as per rules.

Comparative statement showing After-Tax Profit from different alternatives: Figures in ₹

 Particulars Repair Replacement Annual Repairing Expenses (Note 1) 22,500 – Depreciation on the new machine (Note 2) – 1,72,800 Interest on ? 18,00,000 at 15% p.a. – 2,70,000 Depreciation on the old machine 30,000 – Total Expenses 52,500 4,42,800 Expected Profit 9,00,000 15,00,000 Less: Total Expenses 52,500 4,42,800 Net Profit Before Tax 8,47,500 10,57,200 Less: Income Tax @ 31.20% (Rounded off u/s 288B) (Tax at 30% + Health and Education Cess @ 4%) 2,64,420 3,29,850 Profit After Tax 5,83,080 7,27,350

Decision:
It is better to replace the old machine with the new one as overall profit is higher in that option as compared to the under the option of repairing the machine.

Note:
Annual Repairing expenses = ₹ 90,000/4 = ₹ 22,500
Depreciation on New Machine = (₹ 18,00,000 – ₹ 72,000)/10 = ₹ 1,72,800
Depreciation on existing machine = (₹ 1,50,000 – ₹ 30,000)/4 = ₹ 30,000

Question 20.
Sure Success Ltd. wants to acquire an asset costing ₹ 1,00,000. It has 2 options available, the first one is buying the asset by taking a loan repayable in 5 installments of ₹ 20,000 each with 14% interest per annum. The second is leasing the asset for which the annual lease rental charge is ₹ 30,000 up to 5 years. The lessor charges 1% as a processing fee in the first year. Assume Internal Rate of Return to be 10%.

The Present Value factors are

 Year 1 2 3 4 5 PV Factor 0.909 0.826 0.751 0.683 0.621

Assuming that the payments are made at the end of the year, suggest which alternative is better for the company. The rate of depreciation is 15% while the tax rate is 31.20%.

I. If the Asset is taken on lease
Computation of Present Value of Net Cash Outflows under this option: Figures in ₹

 Year Lease Rentals Tax savings at 31.20% Net Cash Outflow Present Value Factor @ 10% Present Value (? ) 1 31,000* 9,672 21,328 0.909 19,387 2 30,000 9,360 20,640 0.826 17,049 3 30,000 9,360 20,640 0.751 15,501 4 30,000 9,360 20,640 0.683 14,097 5 30,000 9,360 20,640 0.621 12,817 78,851

“Processing Fees is assumed at 1% of original cost of asset. Therefore, ₹ 1,00,000 × 196 = ₹ 1,000. Therefore, Total outflow in year 1 = ₹ 30,000 + ₹ 1,000 = ₹ 31,000. Sum of Present value under this option shall be ₹ 78,851.

II. If the Asset is bought using Loan funds as given:
Computation of Present Value of Net Cash Outflows under this option: Figures in ₹

 Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Payment of Loan (Principal) 20,000 20,000 20,000 20,000 20,000 Interest 14,000 11,200 8,400 5,600 2,800 Gross Outflow 34,000 31,200 28,400 25,600 22,800 Depreciation @ 15% 15,000 12,750 10,838 9,212 7,830 Total of Interest and Depreciation 29,000 23,950 19,238 14,812 10,630 Tax savings @31.12% 9,048 7,472 6,002 4,621 3,317 Net Cash Outflow 24,952 23,728 22,398 20,979 19,483 PV Factor 0.909 0.826 0.751 0.683 0.621 PV of Outflow 22,681 19,599 16,821 14,328 12,099

Therefore, some of the present value of net cash outflow under this option shall be ₹ 85,528.

Decision:
It is advisable to opt for taking the asset on lease as the sum of present value p of net cash outflow is lower under this option.

Question 21.
An Ltd. wants to acquire a machine on 1st April 2020. It will cost ₹ 60,00,000. It is expected to have a useful life of 5 years. Scrap Value will be? 10,000. If the machine is purchased through borrowed funds, the rate of interest is 11.5% p.a. Loan is repayable at the end of 5 years. If the machine is acquired through lease, lease rent would be ₹ 16,00,000 p.a. Profit before depreciation and tax are expected to be ₹ 4.5 crores every year. Depreciation is charged at 15% p.a. on Written Down Value. Besides, the additional depreciation is available in the first year. Investment allowance is, however, not available. The average rate of tax may be taken at 31.20%.

a. Acquire the machine through own funds or borrowed funds or
b. Take it on lease.
Present Value factor shall be taken at 10%. At this rate, present values of Re.l are – Year 1: 0.9091, year 2: 0.8264, Year 3: 0.7513, Year 4: 0.6830 and Year 5: 0.6209.
I: If the Asset is bought with own funds:
Computation of Present Value of Net Cash Outflows under this option:

 Particulars Amount (₹) Gross Cash Outflow at year 0 60,00,000 Less: Present Value of savings in tax on account of depreciation (Note 1) (10,22,700) Less: Present Value of Salvage value at end of year 5 (₹ 10,000 × 0.6209) (6,209) Therefore, the Present Value of Net Cash Outflows under this option 49,71,091

Note 1
Computation of Present Value of savings in tax on account of depreciation: Figures in ₹

 Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Written Down Value 60,00,000 39,00,000 33,15,000 28,17,750 23,95,087 Depreciation at 15% on Written Down Value 21,00,000 (60,00,000 × 15%) + (60,00,000 × 20%#) 5,85,000 (₹ 39,00,000 × 15%) 4,97,250 (₹ 33,15,000 × 15%) 4,22,663 (₹ 28,17,750 × 15%) 3,59,263 (₹ 23,95,087 × 15%) Tax Savings at 31.20% on above 6,55,200 (₹ 21,00,000 × 31.20% 1,82,520 (₹ 5,85,000 × 31.20%) 1,55,142 (₹ 4,97,250 × 31.20%) 1,31,871 (₹ 4,22,663 × 31.20%) 1,12,090 (₹ 3,59,263 × 31.20%) PV Factor at 10% 0.9091 0.8264 0.7513 0.6830 0.6209 Present Value (c × d) 5,95,642 1,50,835 1,16,558 90,068 69,597

# In year 1, there is additional depreciation. The rate of such additional depreciation is 20% of the Actual Cost of the asset.

Some of the Present Value of Tax savings on account of depreciation is ₹ 10,22,700

II: If Asset is bought with Loan Funds
Computation of Present Value of Net Cash Outflows under this option: Figures in ₹

 Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Repayment of Loan – – – – 60,00,000 Interest ( ₹60,00,000 × 11.5%) 6,90,000 6,90,000 6,90,000 6,90,000 6,90,000 Gross Outflow 6,90,000 6,90,000 6,90,000 6,90,000 66,80,000 (66,90,000 – 10,000 being scrap value) Depreciation (5) 15% (Ref: Note 1) 21,00,000 5,85,000 4,97,250 4,22,663 3,59,263 Total of Depreci-ation and Interest 27,90,000 12,75,000 11,87,250 11,12,663 10,49,263 Tax Savings on above @ 31.20% 8,70,480 3,97,800 3,70,422 3,47,151 3,27,370 Net Cash Outflow (1,80,480) 2,92,200 3,19,578 3,42,849 63,52,630 PV Factors at 10% 0.9091 0.8264 0.7513 0.6830 0.6209 Present Value (1,64,074) 2,41,474 2,40,099 2,34,166 39,44,348

Some of the Present Value of net cash outflows under this option shall be ₹ 44,96,013

III: If Asset is taken on lease
Computation of Present Value of Net Cash Outflow under this option: Figures in ₹

 Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Lease Rentals i.e. Gross Outflow 16,00,0000 16,00,000 16,00,000 16,00,000 16,00,000 Less: Tax Savings @ 31.20% 4,99,200 4,99,200 4,99,200 4,99,200 4,99,200 Net Cash Outflow 11,00,800 11,00,800 11,00,800 11,00,800 11,00,800 PV Factor at 10% 0.9091 0.8264 0.7513 0.6830 0.6209 Present Value 10,00,737 9,09,701 8,27,031 7,51,846 6,83,487

Therefore, some of the present value of net cash outflows shall be ₹ 41,72,902

Notes:
1. In Option III, instead of applying PV factors for each year from year 1 to year 5, students may apply the Present Value Annuity Factor as Net Outflows are common at ₹ 11,00,800 each year.

2. In Option I and Option II, there is Short Term Capital Loss at end of year 5 as the asset is sold only for ₹ 10,000 against WDV of ₹ 20,35,824 (₹ 23,95,087 less ₹ 3,59,263). However, such Short-Term Capital loss is neglected for decision making as it can be set off only against capital gains (either Long Term or Short Term). Hence, the assumption is that in a given case such loss will not account for any savings in tax.

3. Profit Before Depreciation and Tax is the same under every option and hence is immaterial in decision making. Therefore, it is neglected and the decision is based on the outflows.

Decision:
It is advisable to take the asset on lease as the sum of the present value of net cash outflows is least under that option.

Author’s Note:
Numerical based on “Purchase of Asset v/s Taking Asset on Lease” as covered above are not asked these days in Exams. However, we have included it above as some part of it might be asked for lower weightage of say 5 marks AND also, for conceptual clarity, it is important to solve such questions. The theory question on the said issue can be attempted only if a student knows logic which best could be understood through numerical.

Question 22.
Suresh is employed in Delhi and is drawing ₹ 50,000 per month as salary. Besides, he got a one-month salary as a bonus. He is given an option by the employer, either to accept HRA or a rent-free accommodation which is owned by the employer. HRA is payable @ ₹ 10,000 per month, while the rent for accommodation in Delhi is ₹ 12,000 per month. Advise Suresh, whether it would be beneficial for him to avail of HRA or rent-free accommodation provided by the employer.
Computation of tax liability of Suresh, in case he accepts Rent Free Accommodation:

 Particulars Amount (₹) Basic Salary (₹ 50,000 × 12) 6,00,000 Bonus (One month’s salary) 50,000 Valuation of Rent-Free Accommodation (₹ 6,00,000 + ₹ 50,000) × 15% 97,500 Therefore, Gross Salary 7,47,500 Less: Standard Deduction under section 16(ia) (50,000) Net taxable salary/Total Income 6,97,500 Tax liability On first ₹ 2,50,000 – On ? 2,50,000 to ₹ 5,00,000, Tax @ 5% 12,500 On ? 5,00,000 to ₹ 10,00,000, Tax @ 20% (₹ 1,97,500 × 20%) 39,500 Sub Total 52,000 Add: Health and Education Cess @ 4% 2,080 Net Tax liability 54,080

Salary for valuation of perquisite of accommodation is “Basic + D.A. (TOE) + Any Commission + Bonus + Any other monetary benefits + Taxable element of allowances”.
Computation of tax liability of Suresh in case if he accepts HRA:

 Particulars Amount (₹) Basic Salary (₹ 50,000 × 12) 6,00,000 Bonus 50,000 Taxable House Rent Allowance (refer Note) 36,000 Gross Taxable Salary 6,86,000 Less: Standard Deduction under section 16(id) (50,000) Net Taxable Salary/Total Income 6,36,000 Tax liability On income up to ₹ 2,50,000 – On income between ₹ 2,50,000 to ₹ 5,00,000, tax at 5% 12,500 On income between ₹ 5,00,000 to ₹ 10,00,000, tax @ 20% (₹ 6,36,000 – ₹ 5,00,000) x 20% 27,200 Sub Total 39,700 Add: Health and Education Cess @ 4% 1,588 Total tax 41,288 Rounded off to nearest of ₹ 10 under section 288B 41,290

Working Note:
Taxable House Rent Allowance is computed as follows:

 Particulars Amount (₹) Amount (₹) HRA received (₹ 10,000 x 12) 1,20,000 Less: Exempted u/s 10(13A): Least of following 3:- i.HRA received 1,20,000 ii Rent Paid less 10% of salary* (₹ 12,000 x 12) -(₹ 6,00,000 x 10%) 84,000 iii. 50% # of salary (₹ 6,00,000 x 50%) 3,00,000 Therefore, Exemption 84,000 Taxable HRA 36,000

’Salary for purpose of HRA = Basic + D.A. (Terms of Employment) + Commission (% of sales) i.e ₹ 6,00,000 #50% when rent paid in Mumbai, Delhi, Kolkata, Chennai.

Computation of Net take away of Suresh under both the options: Figures in ₹

 Particulars Accommodation HRA Basic Salary 6,00,000 6,00,000 Bonus 50,000 50,000 Accommodation/HRA – 1,20,000 Gross Inflow 6,50,000 7,70,000 Less: Taxes Payable (54,080) (41,290) Less: Rent Payable – (1,44,000) Net Cash Inflows 5,95,920 5,84,710

Notes:

1. It is assumed that both the houses i.e. the one under the HRA option and the one under the Accommodation option are identical.
2. the decision cannot be taken only on basis of tax outflow as under option of HRA, the assessee is making an extra payment of Rent of ₹ 2,000 from his pocket, as HRA received, is ₹ 10,000 per month, but rent paid is ₹ 12,000 p.m. Such outflow is not involved in the Accommodation option.

Decision:
Since overall net cash inflow is higher under the option of Accommodation, it is advisable to opt for the same instead of HRA.

Question 23.
Make an analysis between the purchase and taking on the lease of an asset for the purpose of business by the assessee considering the Income Tax provisions and the benefits available. Which option is considered to be better as per tax provisions and other benefits?
Analysis between Purchase of an assets and taking the assets on Lease for the purpose of business: –
(1) In case of purchase, depreciation is allowed under section 32. On the other hand, depreciation will not be allowed u/s 32 in case of assets taken on lease.
This principle has also been upheld by the Hon’ble Supreme Court in the case of ICDS Ltd. v. CIT(2013) 350 ITR 527.

(2) In the case of a lease, lease rent paid will be allowed as a deduction u/s 37(1) as revenue expenditure. Repairs are also allowable under section 31.

(3) In case of purchase, insurance premium, current repairs are allowed as deduction u/s 31, and interest on borrowed funds is deductible u/s 36 a revenue expenditure.

(4) Purchase of machinery would create tangible assets which can also be a mortgage in case of finance needs whereas in the case of assets taken on lease, it is not possible.

(5) In the case of the purchase option, residual value at the end of useful life belongs to the Lo owner. Capital gains tax liability or savings should also be taken Into consideration.

The benefits available as to tax payments are to be worked out separately under both the situations and be analyzed to find out which option is better. However, taking of an asset by investing own funds be always found to be better because of the available benefits under the tax laws and having of tangible assets In the business.

Question 24.
What are areas of tax planning with reference to the location of business?
The Income Tax Act. 1961 provides for various benefits based on the location of the business. The various areas of tax planning in relation thereto arc as follows:

1. Special provisions in respect of newly established units in Special Economic Zone (Section 10M)
2. Deduction In respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc. (Section 80-IA)
3. Deduction in respect of profits and gains by an undertaking or enterprise engaged in the development of special economic zone (Section 80-lAB)
4. Special provisions in respect of specified business (Section 80-lAC)
5. Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings, etc. (Section 80.18)
6. Deductions in respect of profits and gains from housing projects (Section 80-IBA)
7. Special provisions in respect of certain undertakings or enterprises in certain special category states (Section 80-IC)
8. Special provisions in respect of certain undertakings in north-eastern states (Section 804E)
9. Deduction in respect of certain incomes of offshore banking units and international financial services center (Section SOLA)

Question 25.
The Board of Directors of your company Is In a dilemma whether to purchase outright the machines for their company or to acquire them through leasing Advice on tax implications.
Or;
Explain leasing wI. buying of a business asset as a tool of tax planning.
In recent years, leasing has become a popular source of financing in India. Leasing is a financial arrangement whereby an organization is vested with the use and control over assets without a title of ownership, in consideration of lease rent for a period of time. The person who leases i.e. the owner is called lessor while the person who takes the asset on lease is called the lessee. The decision to lease or buy an asset with borrowed funds can be made after considering the following:

1. Owned/Borrowed Funds: If the asset is purchased through owned funds, there will be a heavy initial outlay and funds will be locked up being denied other investment opportunities. If the asset is purchased through borrowed funds, then apart from interest payments, the provision would have to be made for payment of loan installments. Lease Reniais: In a lease option, annual lease rentals results in significant
recurring expenditure.

2. Tax implications: The lease rentals are deductible for income tax. purposes as operating expenses of the concern. In case assets arc purchased, the assessee will be entitled to a deduction of depreciation. In the case of the purchase of assets with borrowed funds, the interest payment will also be deductible.

3. The costs of operating the asset art Irrelevant since It Is the same irrespective of the mode of acquisition. However, if operating costs are different in the case of ownership or lease, then they should be considered. In case the firm owns the asset, it has full right over residual value at end of the useful life of the asset, in respect of which capital gains/loss may have to be computed. However, in the case of a lease, the residual value doesn’t belong to the firm.

Author’s Note:
Institute has not been asking such theory questions from tax planning in recent times. However, they have been included in this book so that students could get conceptual clarity on these issues. Hence, it is advisable to thoroughly go through such questions as well.

## Nature of Management and its Process – Business Management Ethics and Entrepreneurship Notes

Introduction:
→ Concept of Management:

• Origin of management is from a Greek word ‘NOMOS’
• It denotes not only functions but also the people who discharge these functions.
• Management is a vital function which is concerned with all the aspects of working of an enterprise.
• It is the art of getting things done.
• It is concerned with human being whose behaviour is unpredictable.

→ Ever since people have began forming groups to achieve individual goals, management has become the essence of coordinating the individual efforts It denotes not only a special position and rank but also a discipline and field of study.

→ Definition of Management

• Koontz and O’Donnell: “Getting things done through and with people”.
• Henry Fayol: “to manage is to forecast, and to plan, to organize, to command, and to coordinate”.
• Hicks: “the process of getting things done by the people and through the people”.
• Haimann: “Management is the process of getting things done through people and directing the efforts of individuals towards a common objective”.

• Since businesses tend to develop their employees (human assets) in the pursuit of financial goals (profits), they benefit society by creating both material and human wealth.
• Material wealth is usually in the form of financial profit.
• And human wealth through the professional development of their employees.

→ Not-For-Profit Organisations: (Institutions):

• Not-for-Profit businesses create both material and human wealth.
• But profits are used for a charitable purposes.
• Typically, institutions such as charities, provide physical and emotional support for the disadvantaged and less fortunate members of society.

→ They help them by:

• Managing their problems
• Creating learning opportunities
• Helping children grow and develop
• Healing the sick
• Providing stability and sense of belonging.

Managers may add value to the wealth-creating process of the business or institution by:

• Changing a part of the company’s strategy.
• Finding a more effective way of marketing products.
• Initiating the redesign of manufacturing process.
• Developing and implementing a more effective approach to customer service.
• Implementing a new organisation structure for the organisation and leading employees in the change process.
• Selecting and developing the most competent employees as part of succeeding planning strategy and so forth.

→ Management Performance:
Management is the process of getting things done by coordinating the activities of people throughout an organisation.

→  Efficiently:
Means in the least time and least cost. It is usually measured as output by input.

Efficiently –
Both inputs and output may be measured in units of quantity, money or time.

Effectively:
It means doing the right things to a required standard of quality.

→ Objectives of Management:

• Management should provide an environment whereby the maximum output can be extracted from an individual.
• Achieving Maximum Output with Minimum Efforts: Human’ financial and material resources can be combined in such a manner that it results in reduction of various costs.
• Optimum Use of Resources: This leads to increase in efficiency which can be obtained by reducing spoilage, wastage and breakage which in turn leads to saving of time, effort and money which is essential for the growth & prosperity of any enterprise.
• Maximum Prosperity: This means smooth and coordinated functioning of the enterprise, which ensures good working conditions, suitable wage system, incentive plans and higher profits to the employer.
• Human’ Betterment and Social Justice: Through increased productivity and employment, management ensures better standards of living and justice through its uniform policies.

→ Importance of Management:

• Achieving Group Goals: Management directs group efforts towards achievement of pre-determined goals. It converts disorganized resources of men, machines, money, etc. into useful enterprise. These resources are coordinated, directed and controlled in such a manner that enterprises work towards attainment of goals.
• Optimum Utilization of Resources: This is possible by selecting its best possible alternate use in the industry from out of various uses. If employees & machines are producing their maximum, there would be no under-employment of any resources.
• Reduces Costs: Proper planning yields minimum inputs into maximum output. The best combination of physical, human and financial resources also results into the cost reduction.
• Establishes Sound Organisation: To attain this objective, management must establish effective authority-responsibility relationship. All jobs should be clear to everyone, which means right job for the right person.
• Establishes Equilibrium: It enables the organisation to survive in the changing environment. To accomplish this, the initial coordination of the organisation must be changed with the change in external environment.

→ Prosperity of Society: Efficient management leads to:

• Better economic production
• Welfare of people
• Avoid wastage of scarce resources
• Improved standard of living
• Increase in profit.

→ Management – Science or Art:

• Science may be defined as a body of knowledge, systematized through application of scientific methods in any department of enquiry.
• Science includes physical sciences which have exactness in their nature and also social sciences which is based on unpredictable human behaviour.
• Management can then be described as a variable growing science if compared with the nature of exact physical sciences.
• Management is still a growing science.
• Management has now a theoretical base.

→ Features of Management as a Science:

• Inexact science, deals with complex human behaviour
• Developing science.
• Inter-Disciplinary Science-learns freely from other disciplines, such as economics, sociology and psychology.

→ Management as an Art:

• The function of art is to effect change or accomplish goals by deliberate efforts.
• Practical application of theoretical knowledge is reflected in art. In this sense, management is an art as well.
• Management principles involves skills to work out situations. This element is so important for executives that some authorities regard management to be essentially an art.

→ Features of Management as en Art:

• Process involves use of know-how and skills.
• Directed towards accomplishment of concrete results.
• Creating productive situations needed for further improvement.
• Personalised because every manager has his own approach to problems.
• Science and art are not mutually exclusive but are complementary.

Theory and practice of management are mutually helpful and go side-by-side for the efficient functioning of any organisation. Thus, science is a body of knowledge while art denotes the mode of practical application of knowledge, hene not mutually exclusive.

→ Management as Profession
Features of Management:

• Systematic body of knowledge.
• Need for learning and proper organisation.
• Entry restricted on the basis of examination or education.
• Dominance of service motive.

Except for restricted entry, management qualifies all other tests of a profession.

• Backed by a systematic body of knowledge.
• Many management principles have been developed which need proper learning and education.
• Management of today must be creative rather than adoptive and be conscious of its ethical and social responsibilities to the society.
• Professional management consultants are both growing in number and quality.

→ Reasons of Raising Management to the status of distinct profession:

• Emergence of the corporate form of organisation.
• Separation of ownership from management.
• Development of an organized body of systematic knowledge.

→ Management Functions
Henry Fayol is also known as ‘Founder of Modern Management Theory’, grouped the elements of management into 5 managerial functions and 6 activities:

Elements/Functions are

1. Planning
3. Controlling
4. Organising
5. Co-ordinating

→ Activities are

• Technical
• Commercial
• Financial
• Security
• Accounting
• Managerial

Top management spend more time in planning, the middle level on organizing and lower level concerned with directing Luther Gulick gave the word POSDCORB using initial letters of management. P-Planning, 0-organising, S-staff ing, D-directing, co-ordinating, fIR- Reporting, B-Budgeting

→ Reporting is a part of control function:
Budgeting represent both planning and controlling Newmann and Summer classified managing process as function of:

• Organising
• Planning
• Controlling

→Management Functions

Planning:
Deciding in advance what is to be done, how and when it will be done. Projecting the future course of action, Helps to bridge the gap between present and future.

Planning process comprises of:

• Objectives
• Policies
• Procedures
• Rules
• Programmes
• Budget
• Strategies

Is the fundamental function, all other functions of management are greatly influenced by planning process.
Top management spend more time in planning, middle level in organising, lower-level manager in directing. Organising: Problem of organising arises only when group efforts are involved.

→ It consists of the following steps:

• Determine activities of organisation keeping in view its objectives
• Classify activities into groups for purpose of division.
• Assignment of these group of activities to individuals.
• Delegate & fix authority & responsibility to carry out assigned duties.
• Coordinate activities and authority relations throughout the organization.

Thus, organising is concerned with orderly assemblage of human and material resources.

leadership determines whether the ladder is leaning against the right wall.” – Stephen R. Covey

• Outlining a vision of what can be achieved.
• Focusing on interpersonal relationships.
• Motivate and inspire employees to perform better.
• Improve employees job performance
• Ensure the accomplishment of tasks on time and corresponding with the required policies.

4. Control:
Good control system should suggest corrective measures so that negative deviations do not occur.
Control is closely related to the planning job of the manager.

Important steps are:

• Measurement of actual performance against standards and recording deviations. It should not be viewed as the post mortem of past achievement and performance.
• Analyzing and probing the reasons for such deviation.
• Fixing responsibility in terms of person responsible for negative deviations.
• Correction of employee performance so that group goals and plans can be achieved.
Feedback can be of great use in this regard.

→ Theory of Scientific Management:

• Federick Taylor is known as Father of Scientific Management.
• He suggests the ‘one best way3 of doing each task.
• Scientific management movement was hailed as a ‘second industrial revolution’.

→ Four principles of Scientific Management:

1. ‘Develop a science’ for each element of work:
It refers to analyse workflows, improve the economic efficiency (providing test breaks) and labour productivity.
2. Scientifically select, train, teach and develop workers to heir them reach their full potential:
Taylor instructs to hire ‘first class’ workers on the basis of their aptitude to do a job well and also train them.
3. Cooperate with employees to ensure Implementation of scientific management:
Taylor emphasised Viet the interest of employer and employees must be same (not antagonist), that prosperity for the employee cannot exist for many years unless it is accompanied by the prosperity for the employees and vice versa.
4. Principle of Scientific Management was to divide the work and the responsibility equally between management and workers: Taylor said, “Almost every act of workman should be preceded one or more preparatory acts of the management which enable him to do his work better and quicker than he otherwise could.”

→Development of Management Theory:
Principles of Management:
Various management principles given by different authors are as follows:
Frederick Taylor: Popularly known as lather of scientific management. He began his career as an apprentice in small machine shop and rose to the level of engineer. His writing reflects the practical wisdom and work experience. His main concern was management a shop level and he was mainly concerned with efficiency of workers are managers at production level. Public criticism and opinions compelled him to appear before the special congressional committee hearings in 1912.

The major principles of his scier1titíc management can be summarised as below:
Henry Laurence Gantt: “Task and Bonus Plan” rask and Bonus Plan: A wage incentive plan in which high task efficiency is maintained by providing a percentage bonus as a reward for production in excess of standard.

→ Principles from Scientific Management Times:
rime approach is developed by Frank Bunker Gilbreth & his wife, Lillian Moller Gilbreth, They emphasised the importance of giving greater attention to minute details of work and also developed the principles o motion economy, intended to eliminate redundant motions and produce rhythm by scientific development of essential motions.

→ Bureaucracies & Corporations: Max Weber:
Maximilian Karl Emil “Max” Weber (1864-1920) proposed the idea of bureaucracies at a time when promotion to prominent position of authority was based on who you knew (politics), who you were (heredity) or traditions.

Bureaucracy is the exercise of control on the basis of knowledge, expertise or experience Fairness as oppose to favouritism.

→ The main principles of bureaucratic management are as follows:

• Qualification-based hiring: Employees are hired on the basis of their technical training or educational background.
• Merit-based promotion: Promotion is based on experience or achievement.
• Chain of command: Official hierarchy of authority who is in charge of whom and whose permission must be asked.
• Division of Labour: Task, responsibilities & authority are clearly divided & defined.
• Impartial application of Rules & procedures: Rules and procedures apply to all members of the organisation as well as top to bottom without any liberty.
• Recorded in writing: All administrative decision, acts, rules or procedures will be recorded in writing.
• Managers separate from Owners: The owners of an organisation should not manage or supervise the organisation.

→ Henry Fayol: Popularly known as father of modern management theory;
Published (1916) “Administration Industrielle et Generate” (Industrial and General Administration) No English translation could be available until year 1929. He started his carrier as coal mine engineer in 1860 in french coal mine and was MD (chief executive) from 1883-1918.

(a) He divided all activities of industrial enterprise into the following 6 groups:

• Technical activities concerning production.
• Commercial activities of buying and selling.
• Financial activities to seek optimum use of capital.
• Accounting activities pertaining to final accounts and costs and statistics.

→ Contributions of Sociologists, and Psychologists:

• The behaviour a lists says that the study of management should be concerned with human behaviour in organisations and related matters: Organisational effectiveness depend on the quality of relationships among people.
• Hawthorne experiments (1928-32) conducted by Elton Mayo.
• Good management requires ability to develop interpersonal competence and support collaborative efforts.
• Psychologists and sociologists have laid the foundation of interdisciplinary approaches to the study of organisation and management.
• Psychologists & sociologists have made significant contributions to the behavioural school of thoughts.

→ Systems Approach:

• A system is a set of things interdependent so as to form a complex unity.
• This approach defines organisation as a complex whole consisting of mutually interdependent parts which interacts with the environment of which it is a part.

→ There are two types of Systems:

1. Open Systems
2. Close Systems

1. Open Systems: An open system approach recognises the dynamic interaction with the environment (i.e. suppliers, labour unions, financial institutions, govt, agencies etc.).

2. Close Systems: A close system does not interact with and is not influenced by the environment in which it operates.

→ Managerial Roles:

• Henry Mintzberg (1973) published The nature of Managerial work’
• He characterized the managerial work as “brevity, variety and fragmentation”.
• – Mintzberg categorises manager’s activities into ten roles.
 Managerial Roles Interpersonal Roles Informational Roles DecIsional Roles (i) Figurehead (ii) Leader (iii) Liaison (iv) Monitor (v) Disseminator (vi) Spokesperson (vii) Entrepreneur (viii) Disturbance handler (ix) Resource Allocator (x) Negotiator

 Administration Management 1. Concerned with policymaking. Policy implementation 2. Functions are legislative and determinative. Functions are executive and governing. 3. Concerned with planning and organizing. Concerned with motivating and controlling. 4. Normally involves Board of Directors. Involves personnel below the level of Board of Directors.

→ Practically:
Practically, management is as much responsible for planning as is administration.
Administration is a process of laying down broad policies & objectives of the organisation, whereas management directs & guides the operating activities towards relating the objective set forth by former.
It is also said that administration is a function while management is a lower level.

→ Managerial Skills:
Essential skills which every manager needs for doing better management are called as ‘Managerial Skills’.

According to Prof. Katz, “Managerial skills can be technical, human & conceptual.”
Top-level – more conceptual and less technical skills Lower level – more technical and less conceptual.

Human relation skill are equally required by all three level of management.
1. Conceptual Skills:

• The ability to visualize the organization as a whole.
• Includes analytical, creative & initiative skills. Helps the managers to identify the problems.
• Mostly required by top-level managers because they spend more time ¡ri planning, organising and problem-solving.

2. Human Relation Skills:

• Also known as interpersonal skills.
• Help the managers to understand, communicate and work with others, and to lead, motivate and develop team spirit.

3. Technical Skills:

• Helps the managers to use different machines and tools. i.e. improves their ability to perform.
• Mostly low-level managers require these skills. rasks and Responsibilities of Professional Managers
A professional manager is an expert, trained and experienced to aptl manage any type of organisation.

→ Qualities of a Professional Manager:

• Objective, focused & performance-oriented.
• Help in meeting competitive challenges.
• Creative and dynamic.
• Follow management practices based on experience & information.
• Apply management theories to solve emerging problems.

→ Professional Manager’s Tasks include the following:
1. Providing Direction to the Firm: It means envisioning goals.
Effectively declare what’s possible for the team to achieve and compelling them to accomplish more than they thought.

2. Managing Survival and Growth:

• Two factors are important for survival & growth, internal and external factors.
• Internal factors are largely controllable, such as choice technology, efficiency of labour etc.
• External factors are government policy, changing taste of customers, attitudes & values, increasing competition etc.

3. MaIntaining Firm’s Efficiency: The manager should complete his tasi in an efficient manner. The more output he will produce with given input, greater will be his profit.

4. Meeting the Competition Challenge: Managers must anticipate & prepare for increasing competition.

5. Innovation: It is an ongoing task, necessary for survival in this age of competition.

6. Renewal: Means providing new processes and resources. Renewal also helps the business to survive.

7. Building Human Organisation: Every manager must constantly bol out for people with potential and attract them to join the company.

8. Change Management: It’s the manager’s task to ensure that the change is introduced and incorporated in a smooth manner.

9. Selection of Information Technology: Computers, Internet, Intranet confront the modern manager with the challenge of using the best technology.

10. LeadershIp: “A leader can be a manager, but a manager is no necessary a leader”, says’s Gemmy Allen.

• It is the persuasion of the person over others to inspire actions for achieving the goals.
• Involves interpersonal characteristics of a manager’s position that involves communication with team members.

11. Change Management: A manager’s task is to ensure that the change is introduced and incorporated in a smooth manner.

12. Selection of Information Technology: Computers, internet, Intranets, telecommunication and infinite range of software application poses the managers with the challenge of using best technology.

Nature of Management and its Process MCQ Questions

1. The economic environment consists of 3 basic entities:
(a) Households (consumers), firms (producers), and manufacturers.
(b) Producer (firms), Retailer and Consumer.
(c) Households (consumers), firms (producers) and Government (co-ordinator)
(d) None of the above.
(c) Households (consumers), firms (producers) and Government (co-ordinator)

2. Management is originated from the Greek word:
(a) Kiyo
(b) Nomos
(c) Like
(d) None of the above
(b) Nomos

3. defined management as the process of getting things done by and through the people.
(a) Hicks
(b) Koontz and O’Donnell
(c) Henry Fayol
(d) Haimann
(a) Hicks.

4. The combination of human, material and financial resources should result in:
(a) Reduction of cost
(b) Increase in revenue
(c) Greater production
(d) None of the above
(a) Reduction of cost.

5. The efficiency of factors of production can be increased by:
(a) Optimum utilisation of resources
(b) Reducing costs
(c) Good working conditions
(d) None of the above
(a) Optimum utilisation of resources.

6. Management is a and science.
(a) Exact & disciplinary
(b) Inexact and interdisciplinary
(c) Exact and social
(d) None of the above
(b) Inexact and interdisciplinary

7. Management is an art because it involves and …………….. .
(a) Experience and intelligence
(b) Creativity and personalization
(c) Skills and knowledge
(d) None of the above
(b) Creativity and personalization.

8. Management as a profession satisfies all the tests. True or false?
(a) True
(b) Partly True/Partly false
(c) False
(d) None of the above
(c) False

9. Which approach involves making generalizations from case study to establish theories as a useful guide?
(a) Group Behaviour Approach
(b) Decision Theory Approach
(c) Empirical Approach.
(d) Operational Approach
(c) Empirical Approach.

10. Interpersonal behaviour approach is also known as:
(a) Behavioural science, leadership or human relations approach
(b) Behavioural science and decision making approach
(d) None of the above
(a) Behavioural science, leadership or human relations approach.

11. …………………. is the core of management according to decision theory approach.
(b) Decision making
(c) Motivation
(d) Planning
(b) Decision making

12. Mathematical approach is closely related to:
(a) Empirical approach
(b) Interpersonal behaviour approach
(c) Operational approach
(d) Decision theory approach
(d) Decision theory approach

13. approach recognizes that the problems faced by managers vary with nature and size of enterprise.
(a) Operational
(b) Group Behaviour
(c) Decision theory
(d) Mathematical approach
(a) Operational.

14. ……………, a french industrialist is known as ‘father of modern management theory.
(a) Luther Gulick
(b) Henry Fayol
(c) Newmann & Summer
(d) None of the above.
(b) Henry Fayol

15. Which word did Luther Gulick coin using initial letters of management?
(a) POSBRD
(b) POSDBRD
(c) POSDCORB
(d) None of the above.
(c) POSDCORB.

16. True or false: Success on part of executives essentially calls for capability to promote self-appraisal.
(a) True
(b) False
(c) Partly True
(d) None to these.
(b) False

17. ………………….. is a preparatory step and bridges the gap between present and future.
(a) Organising
(b) Staffing
(c) Directing
(d) Planning
(d) Planning.

18. …………….. and …………….. are fundamental aspects of organisation.
(a) Division of work and coordination of their efforts
(b) Delegation of authority & determination of activities
(c) Determination & classification of activities
(d) Delegation of authority & coordination of activities.
(a) Division of work and coordination of their efforts

19. ………………….. function calls for properly motivating, communicating, leading & supervising the subordinates.
(a) Staffing
(b) Organising
(c) Direction
(d)Controlling
(c) Direction.

20. True or false: If cooperation exists, coordination will automatically follow.
(a) True
(b) False
(c) Partly True
(d) Partly False
(a) True

21. Co-ordination is achieved through understanding of …………………….. relationships.
(a) Interpersonal, (horizontal)
(b) Vertical
(c) Hierarchical
(d) None of the above
(a) Interpersonal, (horizontal).

22. ……………….. is the father of ‘scientific management.
(a) Henry Fayol
(b) Frederich Taylor
(c) Luther Gulick
(d) Newmann & Summer
(b) Frederich Taylor.

23. ‘Task and Bonus Plan’ was devised by:
(a) Taylor
(b) Fayol
(c) Newmann & Summer
(d) None of the above
(d) None of the above

24. Authority and responsibility are ………….. .
(a) Co-extensive
(b) Mutually exclusive
(c) Complimentary to each other
(d) None of the above
(a) Co-extensive

25. Management is affected by and in turn, affects the system in which it operates. Thus, it is a system.
(a) Closed
(b) Open
(c) Neither closed nor open
(d) Notice of the above
(b) Open

26. Entrepreneur’s role of a disturbance handler, allocator of resources & negotiator’s role are the roles that the manager has to perform.
(a) Interpersonal
(b) Decisional
(c) International
(d) None of the above
(b) Decisional

27. Functions of administration are & …………… .
(a) Executive & governing
(b) Policy making & implementation
(c) Legislative & determinative
(d) Sustaining & controlling.
(c) Legislative & determinative

28. Managerial skills are classified as ………. & ………… by Katz.
(a) Technical, human & conceptual
(d) Administrative, decision making & communication.
(a) Technical, human & conceptual.

29. ………………….. is one of the objectives of the management.
(a) Establishing equilibrium
(b) Maximum Prosperity
(c) Prosperity of society
(d) Reducing cost.
(b) Maximum Prosperity

30. It refers to superior-subordinate relations throughout the organisation,
(a) Espirit de corps
(b) Order
(c) Equity
(d) Scalar chain
(d) Scalar chain

31. Management is an ………………….. science.
(a) Exact
(b) Inexact
(c) Flexible
(d) Rigid
(b) Inexact.

32. Management as an Art denotes the mode of:
(a) Body of knowledge
(b) Sociology
(c) Practical application
(d) None knowledge
(c) Practical application.

33. Management fails to qualify the test of Professionalism relating to:
(a) Systematic body of knowledge
(b) Dominance of service motive
(c) Restricted entry
(d) None
(d) None.

34. Which of these provides the organisation with adequate number of competent and qualified personnel at all levels of Management.
(a) Human Resource Management
(b) Planning
(c) Organising
(d) None of the above
(a) Human Resource Management.

35. Which is the ‘last’ Process of Management?
(a) Directing
(b) Planning
(c) Controlling
(d) Organising
(c) Controlling

36. “Maintaining discipline and rewarding effective performance ” comes under.
(a) Human Resource Management
(b) Control
(c) Organising
(d) Directing
(d) Directing.

37. Fayol suggests the following ………………… Principles of the management.
(a) 12
(b) 14
(d) 8
(c) 11
(b) 14

38. According to which Principle, “An employee shall receive orders from one senior only”.
(a) Unity of direction
(b) Unity of command
(c) Discipline
(d) Division of work.
(b) Unity of command.

39. According to which Principle “The need for teamwork and the importance of effective communication is needed”?
(a) Equity
(b) Esprit de corps
(c) Initiative
(d) Remuneration.
(b) Esprit de corps.

40. Psychologist and have made significant contributions to the Trainers Scientists
(a) Mentors
(b) Trainers
(c) Sociologists
(d) Scientists
(c) Sociologists

41. Which managerial skills are also called as ‘design skills’?
(a) Technical skill
(c) Problem-solving skill
(d) None.
(c) Problem-solving skill.

42. The lower-level managers require more technical skills because they are of the actual operation.
(a) Supervisor
(b) Charge
(c) Incharge
(d) Performer
(c) Incharge

43. Technical, human and conceptual are the types of ………….. .
(a) Technical skills
(b) Managerial skills
(c) Specific
(d) None.
(b) Managerial skills

44. Which of the following is not the task of Professional management,
(a) Innovation
(b) Renewal
(c) Change management
(d) None of these
(d) None of these

45. Administration does the function of:
(a) Policymaking
(b) Implementing Plan
(c) Compromising Plan
(d) None.
(a) Policymaking.

46. Analytical creative and initiative skills comes under which managerial skill.
(a) Technical skills
(d) Conceptual skills
(d) Conceptual skills.

47. Conceptual skills are generally needed by:
(a) Top-level management
(b) Lower level management
(c) Middle-level management
(d) Both b & c
(a) Top-level management

48. Which of the following is the third step in the process of organising.
(a) Determination of activities of the
(b) Co-ordination of activities enterprise
(c) Assignment of the groups of activities
(d) Delegation of authority to individuals
(c) Assignment of the groups of activities.

49. Behaviourahst approach was given by:
(a) Elton Mayo
(b) R.C. Dewis
(c) A.H. Maslow
(d) Henry Mintzberg
(a) Elton Mayo.

50. Socialist and Psychologist contribution to behaviouralist approach is given by:
(a) A.H. Maslow
(b) Henry Mintzberg
(c) Me Gregor
(d) All of the above
(d) All of the above.

51. Who coined the word POSDCORB about functions of management?
(a) Henry Lawrence Gantt
(b) Henry Fayol
(c) Newmann and Summer
(d) Luther Gulick.
(d) Luther Gulick coined the word POSDCORB using the initial letters of Management functions
P Planning
O Organising
S Staffing
D Directing
Co. Co-ordinating
R Reporting
B Budgeting.

52. Management is a/an :
(a) Exact science
(b) Interdisciplinary science
(c) Science as well as are
(d) B & C both.
(d) Management is an interdisciplinary science it draws freely from other disciplines, such as economics, sociology and psychology and the fact is that science is a body of knowledge, while art denotes the mode of practical application of knowledge. Hence, B & C both is correct answer.

53. Who corrected the difficulties of Taylor’s differential piece rate system?
(a) Henry Lawrence Gantt
(b) Henri Fayol
(c) Newmann and Summer
(d) Max Weber
(a) Henry Lawrence Gantt for instance corrected to some extent the difficulties of Taylor’s differential piece rate ‘ system where two rates of wage, one lower and one higher are fixed. Those who fail in attaining the standard, are paid at lower rate and those exceeding the standard or just attaining the standard get higher rate’ by devising a new method known as the “task and bonus plan”.

54. Which one of the following definitions of management is given by Henry Fayol?
(a) Management is to forecast, to plan, to organise, to command, to coordinate and control activities of others.
(b) The process of getting things done by the people and for the people
(c) The functions of getting things done through people and directing efforts of individuals towards a common objective.
(d) None of the above.
(a) According to Henry Fayol, management is “to manage is to forecast, and to plan, to organise to command, to co-ordinate and to command”.

55. Who distinguished between ‘principles’ and ‘elements’ of management?
(a) Fredrick Taylor
(b) Newmann and Summer
(c) Henry Fayol
(d) Henry Lawrence Gantt.
(c) Henry Fayol distinguished between principles and elements of
management, using the former for rules and guides, and the element of management for its functions. He grouped these elements into five managerial functions as:
– Planning
– Organising
– Commanding
– Co-ordinating
– Controlling

56. At which level of management hierarchy intellectual skill is the most important & vital?
(a) Lower
(b) Middle
(c) Higher
(d) All of the above.
(c) The top-level managers require more conceptual skills and less technical skills. Thus, intellectual skills are most vital for higher level of management since they have to make plans keeping in mind the whole organisation.

57. Superior – Subordinate theory was given by.
(a) Henry Fayol
(b) V. A. Graicunas
(c) Koontz O’ Donnel
(d) Joseph Jerard.
(a) Henry Fayol gave the 14 principles of management among which one is Scalar chain which refers to superior-subordinate relations. throughout the organisation. It should be short-circuited and not to be carried to the extent it proves detrimental to the business.

58. Which of the following is a concept given by Frederick Taylor?
(a) Division of work
(b) Unity of command
(c) Stopwatch study
(d) None.
(c) Fredrick Taylor gave the following principles and elements of management-

• Separation of planning and doing.
• Replacement of old rule of thumb by scientific method.
• Scientific selection and training of workers.
• Absolute co-operation between labour and management in work performance.
• Determining time standard for each job through stopwatch study.
• Introduction of system of functional foremanship.
• Differential piece rates of wage payment.

59. Management is concerned with the …………. .
(a) Executive Governing
(b) Implementing planning
(c) Policy implementation
(d) Policy making.
(c) Management is a dynamic process because it keeps on changing with the changes which takes place in environment and as well as a continuous process because it is required until the goal of organisation is achieved. Hence, both the processes are related with management, thus option C is correct i.e. both fat & fb

60. Which theory is known as the core of management?
(a) Operational Approach.
(b) Mathematical Approach.
(c) Group Behaviour Approach
(d) Decision Theory Approach.
(c) Management is a lower level function, it only directs and guides the operations of an organisation towards realizing goals set forth by the administration. Administration is concerned with policy making whereas management is concerned with policy implementation.

61. It is defined as a systematized body of knowledge through application of a scientific method in one department of enquiry.
(a) Science
(b) Management as a science
(c) Only (b)
(d) None of the above.
(d) Decision theory approach is known as the core of management. They concentrate on rational decision making, selection from among possible alternatives of a course of action or policy.

62. Administration is mostly used at of management.
(a) Top level
(b) Lower level
(c) Middle level
(d) All levels.
(a) Science is defined as a systematized body of knowledge through application of a scientific method in one department of enquiry.

63. ‘Getting things done through and with the people is given by:
(a) Koontz and O’Donnell
(b) Henry Fayol
(c) Haimann
(d) Hicks.
(a) Administration is a process of laying down broad policies and objectives of the organisation. It is a top-level function. It is mainly concerned with policymaking.

64. Who is the father of Scientific Management?
(a) Henry Fayol
(b) Fedrick Taylor
(c) Fedrick Lawrance Cantt
(d) Fedrick Gillbath
(a) Koontz and O’Donnell states that Management means, “Getting things done through and with people”. ‘

65. Which approach involves making generalization from case study to _ establish theories as a useful guide?
(a) Group behaviour approach
(b) Decision theory approach
(c) Empirical approach
(d) Operational approach.
(b) Frederick Taylor is popularly known as the ‘father of scientific management.

66. ‘The process of getting things done by the people and through the people” is given by:
(a) Hick
(b) Henry Fayol
(c) Koontz O’Donnell
(d) Haimann.
(c) Scholars belonging to Empirical Approach believed that clear understanding of the management theories can only be developed by the study and analysis of cases and comparative approach. In this approach, they intend to make some generalisations from case study with view to establishing theories as useful guides for future course of action.

67. ‘To manage is to forecast and to plan, to organize, to command, to co-ordinate and to command” is given by?
(a) Haimann
(b) Luther Gulick
(c) Newmann and Summer
(d) Henry Fayol.
(a) Hick defines management as “the process of getting things done by the people and through the people.”

68. “Knowhow and skill” are the features of:
(a) Management as a Science
(b) Management as an Art
(c) Management as a Profession
(d) All of the above.
(d) According to Henry Fayol, “to manage is to forecast, and to plan, to organize, to command, to co-ordinate and to command.”

69. Which word did Luther Gulick coin, using the initial letters of management functions?
(a) POSCRD
(b) POSBRD
(c) POSCARB
(d) POSDCORB.
(d) Luther Gulick coined the word POSDCORB using the initial letters of management functions:
P = Planning
O = Organising
S = Staffing
D = Directing
Co = Co-ordinating
R = Reporting
B = Budgeting

70. The principles of unity of command and unity of direction was given by:
(a) W.F. Taylor
(b) Lyndall Urwick
(c) George Tenny
(d) Henry fayol.
(d) Henry Fayol is popularly known as father of unlearn management theory. He suggested 14 principles of management; which includes Unity of command & Unity of direction.

• It should be targeted to improve sales of product.
• It should be prepared by professional agencies.
• It must leave a positive impact over sales.
• It may be expensive for small enterprises.

71. Which of the following statement is not true?
(d) Henry Fayol, “father of unlearned modern management theory” suggested 14 principles of management.

72. How many principles of management were suggested by Henry fayol?
(a) 13
(b) 16
(c) 12
(d) 14.
(c) According to Katz, “Managerial skills can be technical, human and conceptual”. Hence, option c is correct.

73. Greek work ‘Nomos’ means:
(a) Controlling
(b) Planning
(c) Organizing
(d) Management.
(d) The Greek word ‘nomos’ means Management.

74. Who gave manager’s role three phases:
(a) Frederick Taylor
(b) Henry Fayol
(c) Henry Mintzberg
(d) Luther Gulick.
(c) According to Henry Mintzberg, a manager’s work role has three phases:

1. Interpersonal role
2. Informational role
3. Decisional role

75. Technical, human, and conceptual are type:
(a) Specific
(b) Technical Skills
(C) Managerial Skills
(d) All are applicable
(c) Essential skills which every manager needs for doing better management are called as Managerial Skills. Managerial skills are classified as technical, human and conceptual by Katz.

76. The essential skills which every manàger needs for doing better management is known as:
(b) Teaching skills
(c) Professional skills
(d) Managerial skills.
(d) The essential skills which every manager needs for doing better management are called as Managerial Skills.

77. ‘Luther Gulick coined the term:
(a) POSDCORBS
(b) POSD
(C) PODSCORB
(d) POSDCORB
(d) ‘Luther Gulick’ coined the word ‘POSDCORB’ using initial litters of management functions:
(P) – Planning
(O) – Organising
(S) – Staffing
(D) – Directing
(CO) – Co-ordinating
(R) – Reporting
(B) – Budgeting

78. Interpersonal, informational and decisional roles are the three phases of a manager’s work role.. This theory was given by:
(a) Henry Mintzberg
(b) Koontz O’ Donnell
(c) Luther Guhok
(d) Henry Fayol.
(a) According to Henry Mintzberg, a managers work role has three phases which include Interpersonal role, Informational role and decisional role which thereby focuses in contact and dealings with other people, understanding of his organisation and role of initiating change, taking risk and performing role of allocator, negotiator as well.

79. Greek word “Nomos means:
(a) Management
(b) Organising
(c) Controlling
(d) Planning.
(a) The word “management” has its origin from the greek word ‘nomos’ which means management. It involves not only a function but also the people who discharge it. It Is management that provides planning, organization and direction which are necessary for business operations.

80. Which word did Luther Gulick coin, using the initial letters of management functions?
(a) POSDCORB
(b) POSCARB
(c) POSCRD
(d) POSBRD.
(a) Luther Gulick coined the word POSDCORB using the initial letters of management functions:
Planning(P),
Organising(O),
Staffing(S),
Directing(D),
Coordinating (Co),
Reporting (R) and
Budgeting (B).

81. Who has defined management as the process of getting things done by the people and through the people?
(a) Henry Fayol
(b) Hick
(c) Koontz & O’Donnell
(d) Haimann
(b) Hick defines management as the process of getting things done by the people and through the peopls.

82. Which of the following refers to superior-subordinate relations, throughout the organisation? .
(a) Scalar chain
(b) Equity
(c) Esprit de corp
(d) Order
(a) Scalar Chain: it refers to superior-subordinate relationships throughout the organisation. It should be short circulated and not be carried to the extent that it proves detrimental to the business.

83. Which of the following is not a principle given by Henry Fayol?
(a) Unity of Direction
(b) Unity of Command
(c) Positive Attitude
(d) Division of world.
Fayol observed that the importance of managerial ability increases as one goes up the echelons of management hierarchy. He also emphasised the need for training in management for which development of management theory is essential. On the basis of his experiences and foresight into the field of management, Fayol suggested the following fourteen principles of management. Thus, positive attitude is none of the principles by Fayol.

84. The definition of management Getting things done through and with people’ was given by:
(a) F.W. Taylor
(b) Koontz & O’ Donnell
(c) Luther Gulick
(d) Henry fayol.
(b) Koontz & O’Donnell state that management means, “Getting things done through and with people”. Thus, option b is correct.

85. The fast that Management draws its body freely from other disciplines such as economics, sociology, and psychology makes it:
(a) Interdisciplinary
(b) Science
(c) Profession
(d) Art.
(a) The Stream of Management draws certain aspects from various disciplines. Hence, making it the interdisciplinary science.

86. How many principles of management were suggested by Henry Fayol?
(a) 16
(b) 13
(c) 12
(d) 14
(d) Henry Fayol suggested 14 principles of management.

87. Resolving a conflict can be considered as a part of which of the following function?
(a) Planning
(b) Staffing
(c) Organising
(d) Directing
(b) Staffing or Human Resource Management is a-people centred, pervasive function and thus it also includes resolving of conflict among personnel and worker.

88. Which one of the following acronyms did Luther Gulick coin using initial letters of Management’s Functions?
(a) POSBRD
(b) POSDBRD
(c) POSDCORB
(d) POCDSORB
(c) Luther Gullick coin using initial letters of Management’s functions is
POSDCORB where P- Planning O – Organisation
S – Staffing
D-Directing
CO-Co-ordinating
R- Reporting
B-Budgeting

89. Management is an Art because it involves use of:
(a) Experience and Intelligence
(b) Creativity and Personalization
(c) Skills and knowhow
(d) None of the above.
(c) Art means skill development and know-how to tackle situations by techniques. Management is an Art and Science both. Management is an Art because it involves use of skill and know-how to tackle situations by different techniques and it is science because it establishes relation between cause and its results.

90. Who developed the idea of management by objectives (MBO)?
(a) Henry Fayol
(b) William C. Douglas
(c) Both (a) and (b)
(d) Peter F. Drucker
(d) Peter F. Drucker developed the idea of management by objectives 4 (MBO). In his book ‘The Practice of Management in 1954.

91. Who define the management as, “ Getting things done through and with people”?
(a) Henry Fayol
(b) Koontz O’ Donnell
(c) Hick
(d) All of these
(b) According to Koontz 6’ Donnell, “Management is an art of getting things done through the people and with the people.”

92. Management is a/an
(a) Science
(b) Art
(c) Both (a) and (b)
(d) None of these.
(c) Management is a science while drafting strategies or planning and art while executing them, hence it is both science and art as well.

93. Who was given the lower esteem to upper esteem?
(a) Me Groger
(b) Maslow
(c) Elton Mayo
(d) None of these.
(b) Maslow suggest the hierarchy of needs that emphasize the need for self-esteem and self-respect (Esteem needs are the basis of human desires from lower to upper).

94. The principle of “division of work” was given by
(a) Henry Fayol
(b) Federick W. Taylor
(c) M.C. Groger
(d) Henry Lawrence Gantt.
(a) 14 Principles of Business Management provided by Henry Fayol are as follows:

• Division of work
• Authority and Responsibility
• Discipline
• Unity of Command
• Unity of Direction
• Subordination
• Remuneration (viii) Centralisation
• Scalar Chain
• Order
• Equity
• Stability (xiii) Initiative
• Esprit De Corps

95. Which principle of management suggest the discipline of team spirit.
(a) Esprit de corps
(b) Scalar chain
(c) Remuneration ‘
(d) ‘Division of work
(a) Esprit de Corps Principle emphasises the need for teamwork and the importance of effective communication in obtaining it.

96. to involves outlining a vision of what can be achieved, focusing on interpersonal relations by communicating with each employee, and motivating and inspiring people to perform better.
(a) Planning,
(b) Organising
(d) Controlling.
(c) Leading is to involves outlining a vision of what can be achieved, focusing on interpersonal relations by communicating with each employee, and motivating and inspiring people to perform better.

97. Theory X is developed by:
(a) McGregor
(b) Henry Fayol
(c) F.W. Taylor
(d) William Douglas
(a) Theory of X and Theory of Y is developed by Psychologist Dauglas – Me Gregor to explain how managers beliefs about what motivates their people can affect their management style.

98. The Greek word ‘nomos’ means –
(a) Control
(b) Norms
(c) Management
(c) The Greek word ‘Nomos” means ‘Management’ in an ordinary form of english language.

99. Differential piece rate system was devised by –
(a) Henry Fayol
(b) Henri Lawrence Gantt
(c) Frederick Taylor
(d) Peter Drucker
(c) Differential Piece Rate System was devised by ‘Frederick Taylor’.

100. Budget preparation is primarily a planning process whereas its administration is a part of –
(a) Implementation
(b) Controlling
(c) Payments,
(d) Approval Process.
3. (b) Budget preparation is a primarily a planning process whereas its administration is a part of ‘Controlling’.

101. Fathers of scientific management is:
(a) Henry Fayol
(b) Frederick Taylor
(c) Luther Gulick
(b) Frederick Taylor who is popularly known as the Father of Scientific Management. The goal of Frederick Taylor’s (1901) scientific management was to use systematic study to find the “one best way” of doing each task. He gives four principles of management.

102. General and Industrial Management
(a) Luther Gulick
(b) Newman and Summer
(c) Henry Fayol
(d) Frederick Taylor.
(c) As a manager Henry Fayol came to the conclusion that there was a single administrative science application to all types of organisations. In the year 1916, he published his well-known work in French entitled “Administration Industrielle etGenera/e”(industrial and General Administration).

103. What is the Mission Statement of ICSI:
(a) To be a global leader in promoting good corporate governance
(b) Dreamers Dream
(c) Both (a) and (b)
(d) To develop high calibre professionals facilitates good corporate governament.
(d) Mission Statement of ICSI – “To develop high calibre professionals facilitating good corporate governance” as the mission statement describes the desired future of the business.

104. Which one is the general forces?
(a) Customers
(b) Suppliers
(c) Legal
(d) Investor
(c) General forces which effect the organisation indirectly they are classified as.

• Socio-cultural and Demographics
• Technology
• Economic conditions
• Ecology and Physical Environment ‘
• Political and Legal Acronym “STEEP”

105. The word ‘nomes’ has been derived from? ‘
(a) Greek word
(b) French word
(c) Latin word
(d) German word
(a) The word “Management” has its origin in the Greek word “Nomos’ which means ‘Management’.

106. ‘POSDCORB’ is coined by?
(a) Luther Gulick
(b) Koontz O Donnel
(c) Henry Fayol
(d) None of these
(a) Luther Gulick coined POSDCORB using initial letters management functions:
(P) Planning;
(O) Organising;
(S) Staffing;
(D) Directing;
(Co Coordinating;
(R) Reporting;
(B) Budgeting.

## Gst (Compensation To States) Act, 2017 – Advanced Tax Laws and Practice Important Questions

Question 1.
Why is the Goods and Services Tax (Compensation to States) Act, 2017 enacted?
One of the biggest challenges while introducing GST in India was that states were opposing GST, because of their fear of losing revenue after the introduction of GST. The fear was more pronounced in the case of manufacturing/supplier states since the GST was to accrue to the state(s) where the actual consumption of goods takes place as GST is a destination-based tax.

In order to assure a steady flow of revenues to the states by way of compensating the loss, if it arises, Clause 18 of the Constitution (One Hundred and First Amendment) Act, 2016 specifically provided that the Parliament shall, by law, on the recommendation of the Goods and Services Tax Council, provide for compensation to the States for loss of revenue arising on account of implementation of the goods and services tax for a period of five years.

In line with the Constitutional amendment, the Government enacted the legislation known as, the Goods and Services Tax (Compensation to States) Act, 2017 for providing compensation to the States for the loss of revenue arising on account of implementation of the goods and services tax with effect from the date from which the provisions of the Central Goods and Services Tax Act is brought into force (01/07/2017), for a period of five years or for such period as may be prescribed on the recommendations of the GST Council.

Question 2.
Briefly discuss the provisions related to the levy of compensation cess.
Compensation Cess is levied as per section 8( 1) of the Goods and Service Tax (Compensation to States) Act, 2017. As per this section, Compensation 1 Cess is levied on the notified supply of goods or services or both for the purpose of providing compensation to the States for loss of revenue for 5 years or I for such period as may be prescribed on the recommendation of Council, from I enactment of GST law, which may arise due to implementation of GST.

Question 3.
Will refund of Compensation Cess be admissible under GST?
Yes. Circular No. 1/1/2017-Compensation Cess issued by Board clarifies that provisions of section 16 of the IGST Act, 2017, relating to zero-rated supply will apply mutatis mutandis for the purpose of Compensation Cess (wherever applicable), that is to say, that: Exporter will be eligible for a refund of Compensation Cess paid on goods exported by him [on similar lines as a refund of IGST under section 16(3)(a) of the IGST, 2017]; or

(a) No Compensation Cess will be charged on goods exported by an exporter under bond and he will be eligible for a refund of an input tax credit of Compensation Cess relating to goods exported [on similar lines as a refund of input taxes under section 16(3)(a) of the IGST, 2017],

Thus, refund of compensation Cess (if it’s on account of zero-rated supplies) will be admissible to the claimant. The process and procedure for a claim of such refund will be the same as for refund of IGST (on both goods and services) and in respect of accumulated ITC of compensation cess.

Further, in cases of unutilized ITC of compensation cess availed on inputs in cases where the final product is not subject to the levy of compensation cess, it has been clarified vide Circular No. 45/19/2018- GST dated 30th May 2018, that refund of accumulated ITC can be claimed in such situations, however the rebate route ie. payment of IGST and claiming refund of compensation cess of IGST paid will not be permissible in such cases. In such cases, they cannot utilize the compensation cess paid on inputs for payment of IGST in view of the proviso to section 11(2) of the Cess Act, which allows the utilization of the input tax credit of cess, only for the payment of cess on the outward supplies. Accordingly, they cannot claim a refund of compensation cess in case of zero-rated supply on payment of integrated tax.

Question 4.
Answer the following with reference to GST (Compensation to States) Act, 2017:

1. Projected Growth Rate
2. Base year
3. Projected Revenue for any year
4. Calculation and release of compensation
5. The objective of GST (Compensation to States) Act, 2017

(1) Projected Growth Rate
The projected nominal growth rate of revenue subsumed for a State during the transition period shall be fourteen percent (1496) per annum.

(2) Base Year
For the purpose of calculating the compensation amount payable in any financial year during the transition period, the financial year ending 31st March 2016 shall be taken as the base year.

(3) Projected Revenue for any year
The projected revenue for any year in a State shall be calculated by applying the projected growth rate over the base year revenue of that State.

Illustration: If the base year revenue for 2015-16 for a concerned State, calculated as per section 5 is one hundred rupees, then the projected revenue for the financial year 2018-19 shall be as follows:

Projected Revenue for 2018-19 = 100 $$\left(1+\frac{14}{100}\right)^{3}$$

(4) Calculation and release of compensation
The compensation payable to a state has to be provisionally calculated and released at the end of every two months, which shall be finally calculated for every financial year after the receipt of final revenue figures, as audited by the Comptroller and Auditor General of India.

(5) Objective
The objective behind providing compensation to the states is for the loss of 1 revenue arising on account of implementation of the Goods and Services Tax (GST) in pursuance of the provisions of the Constitution (One Hundred and First Amendment) Act, 2016.

Question 5.
What valuation is to be adopted for levying compensation cess? The assessable value of an article imported into India is 1100. Basic Customs Duty is 10% ad valorem; Social Welfare Surcharge – 10%; Integrated tax rate is 18% and compensation cess is 15%.
Compute the value for compensation cess and amount of compensation cess.