a unique case on As- 16

A co. was alloted a land on 30-8-2007 from state development authority. Co. exercised the option of paying installments of land for 4 years.

Till now both principal amount and interest amount has been charged to Capital WIP.

Co. got possession of land on 30-4-2008. Land is meant for expansion of co. but still no active construction has been started yet.

Now as per AS-16 -

1) land is not covered under definition of Qualifying asset and,

2) Since no construction has been started yet. Thus interest amt. cannot be capitalised. ( as per AS- 16)

But Co. got possession after paying 2 installments and As per As- 16 it was ready to use only after possession date.

Whether interest amt . shall be charged to P&L a/c.If yes,then for which period ?

What should be the treatment in Capital Wip if interest of 2008-09 had to be charged to P&l A/c ?

also tell the implications of Sec 43(1) of Income Tax act and its treatment in income tax.

Replies (1)

Hello Jassi,

  • Since construction has not been started yet hence interest cost can not be capatilised. it must be charged to profit & loss account.
  • Capital WIP should be capitalised with the amount excluding the interest.
  • As per Section 43(1) of the Income Tax Act, 1961, Actual cost will be principal amount paid to the State Development Authority.

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