a unique case on As- 16

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ACA

181 Points Posted on 27 June 2010

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)

Chartered Accountant

29 Points Posted on 27 June 2010

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.