purchase of car - entry please

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A J Sankar (Querist)
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07 May 2010 dear sirs.
Please tell the entry for the following details in compliance with applicable (ASs and laws)

Ex showroom price of Car 13,00,000
Life tax 1,65,000
Insurance charges 30,000
Processing fee and stamp duty for obtaining car loan from bank (3250+6750) 10000
Accessories 15000
Other handling charges 1000

Query is whether all expenses mentioned above be capitalised or not.
advice

CA BIREN SHAH

CA BIREN SHAH (Expert)
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07 May 2010 All the mentioned exp has to be capitalised.

Aditya Maheshwari

Aditya Maheshwari (Expert)
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07 May 2010 All the expenses relate to purchase of motor car or are incidental to purchase of motor car and hence should be capitalised.

CA. BIJENDER KR. BANSAL

CA. BIJENDER KR. BANSAL (Expert)
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07 May 2010 As per my opinion, Insurance charges can be t/f to motor car running & maintainance a/c. It is recurring naturee

Aditya Maheshwari

Aditya Maheshwari (Expert)
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07 May 2010 Insurance is a recurring charge. However till the time there is no insurance of the car the same cannot be taken out from the showroom. So first time insurance is compulsory to use the car and hence the same should be capitalised.

Subsequent payments towards insurance should be charged to revenue

A J Sankar

A J Sankar (Querist)
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07 May 2010 Thank Q to all

A J Sankar

A J Sankar (Querist)
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07 May 2010 But how far it is correct to capitalise the loan processing charges to asset? coz.. if total amount is paid through own sources then there are no such cost.

Please clarify.

CA. BIJENDER KR. BANSAL

CA. BIJENDER KR. BANSAL (Expert)
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07 May 2010 Yes , loan processing charges is to capitalized.

Aditya Maheshwari

Aditya Maheshwari (Expert)
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07 May 2010 Missed that point

Processing fee and stamp duty for obtaining car loan from bank (3250+6750) 10000

Not to be capitalised as not relevant to put the car to use and not a compulsory.

A J Sankar

A J Sankar (Querist)
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07 May 2010 thank Q very much.

CA. BIJENDER KR. BANSAL

CA. BIJENDER KR. BANSAL (Expert)
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07 May 2010 Without processing fee and stamp duty, how can anyone get loan for car. It will be cost of acquisatin of car. It will be capitalized.
We are claiming insurance charges on new car as revenue expenditure on last 20 to 30 no of car purchase in group companies. But there is no question by IT Dept as well audtior.

Aditya Maheshwari

Aditya Maheshwari (Expert)
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07 May 2010 Dear Mr. Bansal
Loan processing fees is a type of borrowing cost and as per AS - 16 and A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. As the asset i. e. the car is already ready to be put to use it cannot be capitalised.

And cost as per AS - 10 is
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. Examples of directly attributable costs are:

site preparation;

initial delivery and handling costs;

installation cost, such as special foundations for plant; and

professional fees, for example fees of architects and engineers.

And since insurance is cost of bringing the asset to its working condition for its intended use it should be capitalised.

And to answer ur treatment in other companies many companies follow that procedure of not capitalising but i think it is a cost of bringing the asset to its working condition for its intended use and hence it should be capitalised though many companies do follow method suggested by you of charging it to revenue.

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Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)
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02 June 2010 Car is a fixed asset as per AS 10 if it is held with the intention of providing services and not
held for sale in the normal course of business. If so, Life tax, Insurance charges, Accessories
and other handling charges can be capitalized as per AS 10 being cost directly attributable to
bringing the asset to its intended use. Processing fee and stamp duty charges paid for loan
cannot be capitalized as per AS 10 being a pre acquisition cost and hence to be expensed.

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