Capital expenditure

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CA JAYESH RELKAR (Querist)
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27 August 2013 Whether following are Capital Expenditure :

1) Accounting software e.g. Tally
2) software e.g. SAP
3) Fire Extinguisher
4) Accounting cum billing software
5) If computer is purchased only for the purpose of accounting. Is it a capital expenditure

Plz give answer with clarification that why it is capital expenditure.

Thanks

CMA Ramesh Krishnan

CMA Ramesh Krishnan (Expert)
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27 August 2013 1. Capital expenses
2.Capital expenses
3.Consumables
4.Capital expenses
5.Capital expenses

CA JAYESH RELKAR

CA JAYESH RELKAR (Querist)
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27 August 2013 thanks for your earlier answer.

how come you reach to the conclusion that it is Capital expenditure??

If fire extinguisher is used in hospitals or in CA's office shall i debit it to profit and loss account??

CMA Ramesh Krishnan

CMA Ramesh Krishnan (Expert)
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27 August 2013 As per AS-10 .Fixed asset is an asset held with the intention of being used for the
purpose of producing or providing goods or services and is not held for
sale in the normal course of business.

So based on the benefit of the expenses it can be treated.

Generally fire extinguisher is expirable and replaceable and need to be replaced with in specific period. so it cannot be considered as fixed asset

CA JAYESH RELKAR

CA JAYESH RELKAR (Querist)
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27 August 2013 Ok. But if i purchased computer ONLY for accounting purpose then the condition " used for producing or providing goods or services" is not satisfied even though it meets the condition "not held for sale in the ordinary course of business".

Same in case of accounting software tally.
it is not used for providing goods or services. It is only for our convenience.

CMA Ramesh Krishnan

CMA Ramesh Krishnan (Expert)
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27 August 2013 Asset is having life more than one year in the business are also can be considered as fixed asset and also companies act provides the asset having value of Rs.5000 or more need to be capitalised

CA JAYESH RELKAR

CA JAYESH RELKAR (Querist)
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27 August 2013 For being asset as per AS-10 two conditions needs to be fulfilled as you say.

But accounting software doesnt held with the intention of being used for producing service or product...

The basic test fails in this case.

Same in case of computer if i used in my business for only accounting purpose..

CMA Ramesh Krishnan

CMA Ramesh Krishnan (Expert)
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27 August 2013 Is it possible to provide your product or service without your accounting software and computer at present business scenario, even though accounting is support service?

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CA JAYESH RELKAR

CA JAYESH RELKAR (Querist)
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27 August 2013 The question is not that whether one can imagine a business/world without computer.

If the businessman itself saying that computer is purchased only for the purpose of accounting. that's it.... then it doesnt satisfy the condition as per as-10.

Moreover, one condition for recognition of Fixed asset is "whether economic benefits are generating from it or not".

Now tell me what economic benefit you receive from accounting software e.g.tally
and computer if you purchased only for accounting and for no other use or say for clerical purpose.

CMA Ramesh Krishnan

CMA Ramesh Krishnan (Expert)
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27 August 2013 without accounting and clerical works, if you can generate the income, your argument is fine. such as case only production machinery can be capitalised under your interpretation.

only production or service will not complete your service and generate the income. can you tell as I produced 100 units of finished goods and i generated income for 100 units?.

after production it need to be sold and for sales you need to have some kind of documentation, you can sell your product without any invoice? .

Only providing product or service will not complete your revenue generation

Ganeshbabu K

Ganeshbabu K (Expert)
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27 August 2013 For accounting purpose:-

upgradation of software , purchase of licences and purchase of computer software are intangeble assets,

therefore, expenditure incurred on purchase of software/upgradation software should have been capitalised and amortised over their estimated useful life as per AS 26,

Reference

opinion given by icai commitee
https://220.227.161.86/eac/eacfinal/vol26/2.htm

Thanks & regards
Ganesh babu k

CA JAYESH RELKAR

CA JAYESH RELKAR (Querist)
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27 August 2013 Thanks Ganeshbabu K.

As per As-26 asset means a resource controlled by an enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.

Now tell me what kind of economic benefit you get from accounting software???

CA JAYESH RELKAR

CA JAYESH RELKAR (Querist)
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27 August 2013 My question to CMA Ramesh.

As u said there needs some documentation for sale, only production doesnt bring revenue.

Then, Capitalised Invoice book which i get printed from(Rs. 10,000). It is also incurred in connection to make sales.

As such , capitalised also Advertising expenses because without marketing/advertising the product is not going to generate revenue for you.

The conditions given in AS-10 for term "Asset" and as per AS-26 for term "Asset", both doesnt satisfy????

I am truely not understanding this concept.

Ganeshbabu K

Ganeshbabu K (Expert)
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27 August 2013 Let me correct you,,definition of intangible asset was very clear in AS26
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Definition provided by you can be taken as Definition of Asset and you cannot say it as definition of Intangible Asset As provided in AS26 of ICAI,,
.
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As per AS26, paragraph 6

https://www.mca.gov.in/Ministry/notification/pdf/AS_26.pdf

An intagible Asset is identifiable non-monetary non monetary asset, held for use in production of goods and services ,for rental to others, or for administrative purposes

As per above it is clearly evident that it can be taken as intangible asset As per AS26

Ganeshbabu K

Ganeshbabu K (Expert)
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27 August 2013 AS10 Vs AS26

Prior to AS26 Becoming mandatory ,,all fixed assets whether tangible or intangible assets were covered under Accounting standard 10,,But after AS26,,AS10 WILL NOT DEALT WITH ACCOUNTING IF INTANGIBLE ASSETS,,
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All such provisions there in before for accounting for intangible assets were withdrawn as and when AS26 made mandatory for intangible assets,,
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So refer only to AS26,,and look on provisions there in

Ganeshbabu K

Ganeshbabu K (Expert)
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27 August 2013 I do partially agree with your views,,,But as far as accounting is concerned i would like to go strictly as per ICAI accounting standards...

Actually it was an vexed issue
.
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And in some judgements it was held as revenue expenditure

But For income tax purpose i would like to treat it as revenue expenditure:-

you can see below attached containing infavour to you

https://www.cainindia.org/news/3_2008/expenditure_on_software_is_of_revenue_nature_special_bench.html

Citation:-

a)CIT Vs Southern Roadways Ltd.(2008)304ITR 8
4(Mad)

b)CIT Vs Asahi India Safety glass Ltd.(2011)Del.

Thanks & regards
Ganesh babu k

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