Accounting Treatment

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This query is : Resolved

Sanjay Govil (Querist)

25 March 2008 I need clarification regarding accounting treatment for costs incurred such as flooring, roofing, first time water proofing and other construction expenses incurred on a rented building (not on lease) used by a company for business purposes.

Whether such costs are to capitalized as building or are they to be expensed as repair and maintenance.

I know for a fact that they are to be included in the Block for Buildings under the Income Tax Act, but how is it to be treated under the Companies Act and whether any accounting standard is relevant for this purpose?

Can they be treated as miscellaneous expenditure and amortised over say 5 years?

Thanks

Vikas Garg

Vikas Garg (Expert)

25 March 2008 It needs to be capitalised in the intial phase.

R.V.RAO

R.V.RAO (Expert)

25 March 2008 WHEN THE BUILDING IS RENTED BY A COMPANY HOW CAN THEY CAPITALISE EXP. INCURRED ON A PROPERTY WHERE THE OWNER IS NOT THE COMPANY?
EVEN TO CLAIM AS REPAIRS AND MAINTENANCE , THE OWNERSHIP OF THE BUILDING IS IN SOMEBODY'S NAME.
AT BEST THE COMPANY CAN INCUR THE EXP. AND DEDUCT FROM RENT FOR THE BUILDING PAID BY IT EITHER IN ONE OR MORE INSTALMENTS AS AGREED WITH THE OWNER OF PROPERTY.
R.V.RAO

CA Saurabh Maheshwari

CA Saurabh Maheshwari (Expert)

25 March 2008 MR R.V.RAO IS CORRECT

Sanjay Govil

Sanjay Govil (Querist)

25 March 2008 I believe that whether the building is in the name of the company or not is irrelevant.

Even where rent is paid, expenditure on certain repairs and improvements to the building is necessary for the purpose of the business.

Also, as per Explanation 1 to section 32 of the Income Tax Act, capital expenditure incurred in respect of building not owned has to be included in the Block of Assets.

Therefore, my original query as to accounting treatment under Companies Act and whether any accounting standard is relevant, is still open.

Amit

Amit (Expert)

26 March 2008 Generally such type of expenses are capitalised under the head "Leasehold Improvements" and written off over a period of 5 years.

As per Guidance note on "expenses incurred during construction period" there is para of assets which are not owned by the Company. It says that if anyone incurs expenses of capital nature for which he is not owner, can capitalise the same and it would be appropirate to charge it over a period of 5 years.

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