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Fixed asset cost capitalization

Nitika mehta (article) (50 Points)

30 August 2013

Dear All,

I want to Know whether Detention Charges & Interest & penalties on late payment of Custom Duty (on import of Fixed Assets) are allowed to be Capitalized in Fixed Asset Register as per provisions of Income Tax Act (for Depriciation purposes) and Companies Act. Thankyou in advance.

Regards,

Nitika Mehta

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10 Replies

CA. Nishant Jain (Audit Executive) (411 Points)
Replied 30 August 2013

Dear Nitika,

Any amount paid as interest / charges which are penal in nature are not allowed as an expenditure under Income Tax Act. In case its capitalised, the depreciation benefit will not be available on the same. As per As 10 on Fixed Assets - any expenditure incurred to bring the asset till it is put to use is to be capitalised.

Since, the benefit of the penalty paid will not be allowed under Income Tax Act, it would be prudent enough to charge the above expenses to revenue instead of capitalising.

1 Like

Nitika mehta (article) (50 Points)
Replied 31 August 2013

Dear Nishant,

Thankyou for your valuable response. Can you please explain me in detail provisions of AS 10 regarding capitalization of all these expenses in FAR.

Thanks & Regards,

Nitika Mehta

CA. Nishant Jain (Audit Executive) (411 Points)
Replied 01 September 2013

Dear Nitika,

As per para 9 (Components of Cost) of AS 10: Accounting For Fixed Assets - The cost of an item of fixed asset comprises its purchase price, including import duties and other non-refundable taxes or levies and any directly attributable cost of bringing the asset to its working condition for its intended use; any trade discounts and rebates are deducted in arriving at the purchase price.

Through this expenses in the original query can be capitalised in books of account but the same will not be an allowable expense being penal in nature.

2 Like

Nitika mehta (article) (50 Points)
Replied 01 September 2013

Dear Nishant,

Thank you so much

Shivani (Learner) (1881 Points)
Replied 17 September 2013

nishant sir

why will we charge the above expenses as revenue when you yourself explained that as per AS-10 it should be capitalised !

shivani

CA. Nishant Jain (Audit Executive) (411 Points)
Replied 18 September 2013

Dear Shivani,

Its true that as per AS 10 the amount paid in original query is to be capitalised.

Charging the same to revenue was just a suggestion to avoid mismatch of fixed assets records as per both the acts. The above suggestion can be ignored.

chaitrali m (Student CA Final ) (33 Points)
Replied 18 August 2015

Hello ,

The assessee had imported a machine in F.Y.2007-08 & took the benefit of ESGC scheme , customs duty me got exempted under this scheme.But in F.Y.14-15 the conditions for the same scheme were not fulfilled & Assessee had to pay Customs duty of 560000/- & Interest of Rs.788000/-. My question is, is that interest amount of Rs.788000/- allowed as expenditure under Income Tax Act. or It needs to be capitalised? Please reply as soon.

mayank (Student CA Final ) (63 Points)
Replied 28 September 2015

hello

suppose fixed assets purchased on 1 sept 2015 & put to use on 1 feb 2016 whether interest charges on borrowings will be capitalised i.e. included in cost of fixed asstes?

Mukund (Nil) (36 Points)
Replied 29 September 2015

1.https://delhicourts.nic.in/Nov12/Commissioner%20of%20Income%20Tax%20vs.%20Enchante%20Jewellery%20Ltd..pdf

You can look into that case which talks of taxable nature for Penal & Compensatory Interest & under which condition interest paid is disallowed.

So in case the interest is disallowed then the ETR ( effective tax rate) goes up for the firm.

In respect of financial books customs duty you surely can capitalize.....the interest part of it is when the asset started earning commercial revenue.The transaction should be assumed as if it was done under normal circumstances without any obligatory licenses.