(a) What are Sweat Equity Shares ? Under what conditions can these shares be issued by a company ? (10 marks) (b) What is…

(a) Sweat Equity Shares

Sweat equity shares are equity shares issued to employees or directors for non-cash consideration such as intellectual property, know-how or expertise. Under section 54 of the Companies Act, 2013, they may be issued only to a class of shares already in issue, after a special resolution. An unlisted company must follow the Companies (Share Capital and Debentures) Rules, 2014; a listed company must follow the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021. The special resolution must state the number of shares, their current market price, the consideration and the class of directors or employees. The shares are valued at a fair price by a registered valuer, who also values the intellectual property or know-how received. In a year the issue may not exceed 15 per cent of the existing paid-up equity capital or ₹5 crore, whichever is higher, and the total outstanding may not exceed 25 per cent of paid-up equity capital (50 per cent for a start-up for ten years from incorporation). The shares are locked in for three years from allotment. These conditions protect existing shareholders from dilution and ensure that equity is issued only for verifiable value.

(b) Activity-Based Costing

Activity-Based Costing (ABC) is a costing system that assigns overheads to products, services or customers through the activities that consume them, using cost drivers such as machine setups, inspections, orders or transactions. Traditional absorption costing spreads overheads on volume-based bases like labour hours, which can over-cost high-volume products and under-cost complex low-volume products. ABC first identifies activities, measures resource costs, and then allocates those costs to cost objects according to driver consumption. This gives a more accurate product and customer profitability picture. Strategically, ABC supports corporate strategy by revealing non-value-adding activities that can be eliminated or redesigned, guiding make-or-buy, outsourcing and process-improvement decisions, and enabling better pricing, product-mix and customer-segmentation choices. In an Indian manufacturing context, it helps firms distinguish between high-service customers and standard customers, so resources are directed toward profitable value creation rather than hidden overhead consumption.

(c) Interim Dividend

An interim dividend is a dividend declared by the Board between two annual general meetings. Under section 123(3) of the Companies Act, 2013, the Board may declare it from time to time, but the proviso provides that if the company has incurred a loss during the current financial year up to the end of the preceding quarter, the interim dividend cannot exceed the average rate declared in the immediately preceding three financial years. The auditor’s duties under SA 250 are to verify that the Board has validly passed the resolution, that the dividend is paid out of sufficient profits available after providing for depreciation, and that no impairment of capital is caused. The auditor must also check that the amount is within the limits permitted by the Articles and the Act, that the loss condition is not violated, and that the dividend is properly recorded. If the auditor finds non-compliance, he must report it, because an improper interim dividend may require recovery and may expose directors to liability.

(d) Budget Preparation

Budget preparation for an industrial organization is a sequential, causal process. It begins with the sales forecast, because expected sales determine the volume of output and the resources required. The production budget then translates sales into units to be produced, considering opening and closing stock. From this, the material, labour and overhead budgets estimate the inputs needed and their costs. These operating budgets feed into the cash budget, which shows expected receipts and payments and reveals financing needs. The budgeted financial statements, such as the budgeted profit and loss account and balance sheet, then consolidate the financial consequences. Finally, the master budget is coordinated, reviewed and approved by top management. This sequence ensures that every departmental plan is linked to the sales forecast, that resource constraints are visible, and that strategic objectives are translated into measurable financial targets.

(e) Exceptions to intra-head set-off

Section 70 of the Income-tax Act, 1961 allows a loss from one source to be set off against income from another source under the same head. The exceptions, where a loss can be absorbed only against income of the same kind, are:

• Speculation business (s. 73): a speculation loss can be set off only against speculation profit, though a non-speculation business loss may be set off against speculation income.
• Specified business under s. 35AD (s. 73A): a loss from such a business can be set off only against profits of another specified business.
• Long-term capital loss (s. 70(3)): it can be set off only against long-term capital gains, whereas a short-term capital loss can be set off against either.
• Owning and maintaining race horses (s. 74A): the loss can be set off only against income from that activity.
• Lotteries, crossword puzzles, card games, gambling and betting (ss. 58(4), 115BB): no loss or expense is allowed against such winnings, so no other loss can be set off against them.
• Virtual digital assets (s. 115BBH, from 1 April 2022): a loss on transfer of a VDA cannot be set off against any income, nor can any other loss be set off against VDA income.
• Exempt sources: a loss from a source whose income is exempt cannot be set off against taxable income.

From 1 April 2026 the Income-tax Act, 2025 replaces the 1961 Act, carrying these restrictions forward under renumbered provisions.