Depreciation

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

10 July 2010 Hi all,

"Treatment of Depreciation on Building Demolished"

> XYZ & Co is a Partnership Firm.
> It had an old building whose book value was Rs.715000 as on 31-03-2008.
> During FY 2008-09, it bought a land nearby the above building and it started demolishing the old building for constructing a new building for its hotel business.
> During FY 2008-09, half of the old building was demolished and remaining half in FY 2009-10.
> Construction of new building was also completed in FY 2009-10 and it started its operation in FY 2009-10.
> Scraps of old buildings like teak wood, iron pillars, etc were used in the construction of new building.

Note: New building is constructed on the new land as well as on the land of the old building.

Kindly tell me the accounting treatment and depreciation treatment for the above transactions as per AS and IT Act.1961.

Akhil Agrawal

Akhil Agrawal (Expert)
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11 July 2010 As far as the IT act is concerned it follows the Block system. Therefore the new building will be debited to the block in the Yr. 09-10 as it was put to use in that YR & start claiming Depn. in 08-09 we will add its cost incurred till 31.03.2009 in Block bt will not claim depn as put to use in 09-10. Nothing will be done with the old building and it will b depreciated on WDV by being a part of the Block

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Akhil Agrawal

Akhil Agrawal (Expert)
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11 July 2010 As far as the AS is concerned i m doubtful i will suggest that AS - 26 will come in Play & the Value of the Old building will be reduced in the BS of 31.03.2009. suppose as on 31.03.2009 two floors(original 3 floors) were demolished then (715000/3)*2 will be the Impairment loss. In 09-10 the whole of Old building be demolished & new will be capitalized

However its a rare case in a Partnership firm that the Depn as per IT act & Books are different. Mostly the F.Assets schedule as per the IT act is used. But AS are to be applied for Partnership Firm tooo.

Other Experts can comment on it

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Querist : Anonymous

Querist : Anonymous (Querist)

12 July 2010 Thank for your reply sir.

>What will be the entry for Impairment loss?

>What will be treatment for Scraps of old buildings like teak wood, iron pillars, etc used in the construction of new building.

>Sir, you have said "Nothing will be done with the old building and it will b depreciated on WDV by being a part of the Block" i m not clear with this point. How is it possible to claim depreciation for a demolished building? Please explain...

Waiting for ur reply....

Akhil Agrawal

Akhil Agrawal (Expert)
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12 July 2010 Well for Impairment Loss the Entry is Impairment Loss Dr
Assets Cr.

As far as the Scraps are concerned the in the Income Tax Act there will be no treatment(u wil get this by the Third part). As per the AS there is no need any adj regarding them:

For eg ur old building BV is 500000 out of which Scrap is of Rs. 20000 which is utilized in const of new building & new bldg cost is Rs. 1200000 which includes BV of Scrap of Rs. 20000

Now I.Loss Dr 480000
Old Assets Cr. 480000

New Building Dr. 1180000
To Cash/ Bank 1180000

In BS position will be Rs. 20000 old Assets Dr. & New Asset 1180000 Dr.

3 ) By nothing will be done means that old assets will remain a part of its Block of Assets & continue to be depreciated & new building will form part of that Block.
Its True that it seems that Old Building is demolished but it is still being depreciated but that is the way the Income Tax is. It does not recognize any Impairment like concept

Querist : Anonymous

Querist : Anonymous (Querist)

12 July 2010 Thank u very much for ur kind reply sir...

How will the impairment loss be treated?

Whether will it be adjusted to Capital A/c of partners?

waiting for ur reply sir....

Akhil Agrawal

Akhil Agrawal (Expert)
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13 July 2010 No Impairment Loss will be debited to the P & L a/c

Querist : Anonymous

Querist : Anonymous (Querist)

14 July 2010 Thank you for ur reply sir...

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