Accounting treatment of land development cost
This query is : Resolved
23 March 2013
Mr.X has a Agriculture Land(28 Acre) received by way of inheritance(Acquired by previous owner before 1981). Hence Cost in Balance sheet is Nil,now Mr.X incurring land development Expenditure on above land,what will be accounting treatment for such expenditure....??how to present in balance sheet??and one more question Actually Mr.X is planning to save capital gain tax in future on sale of such land hence only showing land development exp....planning is possible or not???
23 March 2013
First please confirm is such agricultural land is rural land or urban land as per income tax act.
OM SAI SRI SAI JAI JAI SAI
OM SAI SRI SAI JAI JAI SAI
23 March 2013
Rural Agriculture land
24 March 2013
If the agricultural land is Rural agricultural land then any gain arised by the sale of such rural agricultural land is exempted to tax. So you need not to think about minimising of gain and tax on it because of there is no capital gain tax liability on the sale of rural agricultural land.
And the accounting treatment is for the developing expenses for that land my suggestion is debit the all the expenditures incurred for such land development to the capital account and credit the cash/bank account because of such land is gited land and not recognised in the books so give debit to capital account. Eventhough it debited to capital account you can consider this development exepenses while you arising capital gain/loss.
Since the gain on rural agricultural exempted to tax you need not to think about the minimising of gain for the purpose of decreasing of tax liability.
OM SAI SRI SAI JAI JAI SAI
And the accounting treatment is for the developing expenses for that land my suggestion is debit the all the expenditures incurred for such land development to the capital account and credit the cash/bank account because of such land is gited land and not recognised in the books so give debit to capital account. Eventhough it debited to capital account you can consider this development exepenses while you arising capital gain/loss.
Since the gain on rural agricultural exempted to tax you need not to think about the minimising of gain for the purpose of decreasing of tax liability.
OM SAI SRI SAI JAI JAI SAI
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24 March 2013
what if Urban agriculture land.....that is covered in defination of capital assets u/s-2(14).....than can I plan??
24 March 2013
Yes, then you can plan because of while computation of capital gain any development expenses incurred will be allowed as expenditure(i.e as cost of acquisation).
OM SAI SRI SAI JAI JAI SAI
OM SAI SRI SAI JAI JAI SAI
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24 March 2013
I am showing Land at Nil Value in books....so can I show land development by adding in that....I will debit capital account...capital of client gonna reduce...and client want to apply for loan already very less capital he has..
24 March 2013
event though your land value is NIL in your books while computation of capital gain land value shall be considered as the market value as on the date of gift as cost of acquisation and indexation will be allowable from the year 1981 or previouse owner acquisation date which is later and for this cost of acquisation also allowable development costs if any and indexation will be available from the year of development incurred year(if the development is long term i.e before 3 years to the date of sale) if the development is with in 3 years then indexation cost of development not available i.e actual development cost will apply. For your clarification please go through the following example and this example is based on your case facts.
Assume Mr. X your assessee get the gift of urban agricultural land on 1-4-1991 from Mr. Y who is the previouse owner and acquired such property is before 1-4-1981.
Additional details:
Market value of the gifted property as on 1-4-1991 is 50,000
Mr.X incurred development cost in the year 2012 of Rs.1,00,000
Mr. X sold such urban agricultural land in f.y 2012-13 for Rs. 10,00,000
Now computation of long term capital gain
Long term capital gain = Sale consideration - Indexed cost of acquisation - development cost(if any and if it is incurred before 3 years to the date of sale then indexation cost) -expenses incurred for the purpose of sale.
So Sale consideration is Rs.10,00,000
Indexation cost of acquisation is 50000*852/100 = 4,26,000 (Note in the case of gifted property indexation benefit will be abailable from the date of purchase by the previouse owner or 1-4-1981 which is later)
Development cost = Rs.1,00,000 (it is incurred with in 3 years from the date of sale so no indexation benefit will available)
Thus Long term capital gain = 10,00,000 - 4,26,000 - 1,00,000 = 4,74,000 ( assumption no any other expenses incurred at the time of sale)
Note: if you want to decrease capital gain liability to minimise capital gain tax you show any expenditures as development or any expenditure which is related to sale but you have to prove actually such expenditure incurred to the AO if he required.
Now: Accounting treatment if you not want to debit the development expenses to the capital account then you can creat an account of development of agricultural land at grouped it under fixed assets and at the time of sale of such land transfer this to the capital account as well as profit on this sale(i.e sale value - development value - any expenditure for the purpose of sale)(that means actuall profit to the assessee) credit to the capital account then automatically capital balance will increase.
For any more clarification please write and ask.
OM SAI SRI SAI JAI JAI SAI
Assume Mr. X your assessee get the gift of urban agricultural land on 1-4-1991 from Mr. Y who is the previouse owner and acquired such property is before 1-4-1981.
Additional details:
Market value of the gifted property as on 1-4-1991 is 50,000
Mr.X incurred development cost in the year 2012 of Rs.1,00,000
Mr. X sold such urban agricultural land in f.y 2012-13 for Rs. 10,00,000
Now computation of long term capital gain
Long term capital gain = Sale consideration - Indexed cost of acquisation - development cost(if any and if it is incurred before 3 years to the date of sale then indexation cost) -expenses incurred for the purpose of sale.
So Sale consideration is Rs.10,00,000
Indexation cost of acquisation is 50000*852/100 = 4,26,000 (Note in the case of gifted property indexation benefit will be abailable from the date of purchase by the previouse owner or 1-4-1981 which is later)
Development cost = Rs.1,00,000 (it is incurred with in 3 years from the date of sale so no indexation benefit will available)
Thus Long term capital gain = 10,00,000 - 4,26,000 - 1,00,000 = 4,74,000 ( assumption no any other expenses incurred at the time of sale)
Note: if you want to decrease capital gain liability to minimise capital gain tax you show any expenditures as development or any expenditure which is related to sale but you have to prove actually such expenditure incurred to the AO if he required.
Now: Accounting treatment if you not want to debit the development expenses to the capital account then you can creat an account of development of agricultural land at grouped it under fixed assets and at the time of sale of such land transfer this to the capital account as well as profit on this sale(i.e sale value - development value - any expenditure for the purpose of sale)(that means actuall profit to the assessee) credit to the capital account then automatically capital balance will increase.
For any more clarification please write and ask.
OM SAI SRI SAI JAI JAI SAI
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24 March 2013
Thank you very much.....Om Sai Ram...
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