Capitalization of expenses incurred during construction

 

Fact:
The company is in the hotel business and currently we are constructing one hotel. We are capitalizing direct expenses related to construction e.g. architect fees, construction material, security charges at site etc. Other than this some of the expenses relating to construction like salary of staff working on the site or accounts staff who are associated with the construction related work are also capitalized partially. After all these capitalization there are some of the expenses, which are not capitalized for e.g. salary of accounts staff, salary of company secretary, consultancy taken by the accounts department etc. and they go to profit and loss account.
Queries:
1)      Can all the expenses incurred by a company during constructing of the hotel can be capitalized, if no then why (because of any accounting standard or anything else)?
2)      What will be the treatment to be for taxation matters in this case of the expenses not capitalized? Can these expenses be carried forward and to be capitalized when the hotel becomes functional?  
Replies (4)

Ajit

Only costs which are directly attributable to fixed asset  or increases its efficiency are capitalised like - material , labour overheads a-,here, salary , consultancy are indirect expense , thus they are part of revenue expenditure . Hence ,should not be capitalised

 

Hi Ajit

1.)   According to AS-10 Accounting for Fixed Assets the costs that are directly attributable to the acquisition or construction of the Fixed Asset during a particular accounting period can be capitalised. But the general administrative or other OH incurred  cannot not be capitalised.

Hence, the said expenses like salary of accounts staff, salary of company secretary, consultancy taken by the accounts department cannot be capitalised.

But where the above said expenses are incurred exclusively for the purpose of the construction then the same can be capitalised.

2.)    With regard to Taxation the amounts not capitalised are treated as expenses allowed as deduction subject to the aspect of deduction of TDS whereever applicable and mode of payment made.

To my best knowledge there is no issue like carrying forward of the uncapitalised expenses.

 

yes i am agreed with sai karishna

but if any scientific assests has been purchased but since profit are not there they can be carried forwarded

the cost of such assets cant be capitalised as per tax matter

   

if indirect expenses like salary to account deprtment, adminstratione exps etc hasbeen made during the construction period and in which some exps are related to construction to be capitlised and the remaining exps debit to profit & loss a/c

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