Cost of gifted asset

Explanation 2 to Section 43(1) of the Income Tax Act lays down that where an asset is acquired by the assessee by way of gift or inheritance, the actual cost of the asset to the assessee shall be the written down value thereof in the case of previous owner for the previous year in which the asset is so acquired or the market value thereof on the date of such acquisition, whichever is less.

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The provisions of Income Tax Law can determine whether an expenditure is allowable or a receipt is an income , and not how the accounts are maintained by assessee.

The Apex Court, in  Tuticorin Alkali Chemicals and Fertilizers Ltd vs. CIT 227 ITR 172 (SC), made reference to the case of B. S.C. Footwear Ltd. [1970] 77 ITR 857, 860 (CA) wherein the court rejected the argument of well settled accountancy practice as a basis for accepting the same for tax purpose.

I need accounting treatment thats why I posted it in accounts forum instead of tax (I know tax treatment)

1)  www.accountingweb.co.uk/anyanswers/accounting-treatment-1

2) https://webcache.googleusercontent.com/search?hl=en&rlz=&gs_sm=e&gs_upl=158261l158261l0l158858l1l1l0l0l0l0l314l314l3-1l1l0&q=cache:xXkrgIn3AGYJ:https://community.intuit.com/posts/gifted-fixed-asset+gifted+asset+accounting+(www.community&ct=clnk

Debit Asset A/c

Credit Gifts A/c

When an asset is received as a gift, it will be said to be an asset of the enterprise since it is a resource controlled by the enterprise.

AS- 10 is silent about the accounting treatment of assets which is received without consideration.

Therefore, we can take the help of ASI on Inventories which tells the accounting treatment of bottles left by the users in a bar.

That ASI tells, empty bottles left by the users in a bar is an asset of the bar since the bar have the effective control over the empty bottles. Yes, we too agree with the ASI. If it is an asset it is to be recorded in books.....! At What value? Here the cost of empty bottles is "Zero" to the bar. It is absolute that an asset cannot be recorded at Zero value. Hence, ASI insists that bottles shall be accounted at Nominal Value i.e @ Rs. 1 or Rs.100, for control purposes.

I hope that the above explanation is useful to you..!

Thats one viewpoint

I have 2 viewpoints .one viewpoint is, which is followed in AS-12 government grants also and I do agree with the treatment of grant and the same shall apply here but I was unable to find specific treatment

It is genrl practise to record the entry at nominal value and make entry in Fixed asset register. Lateron we can revalue the asset.

In my opinion and following AS-12

Para 7.1 Government grants may take the form of non-monetary assets, such as
land or other resources, given at concessional rates. In these circumstances,
it is usual to account for such assets at their acquisition cost. Non-monetary
assets given free of cost are recorded at a nominal value.

Further para 8.3 states the grant is shown as a deduction from the gross
value of the asset concerned in arriving at its book value. The grant is thus
recognised in the profit and loss  statement over the useful life of  a
depreciable asset  by way of  a reduced depreciation charge.

Case 1 The grant is for partial amount

Asset (Total cost less incurred by way of grants)

To Bank (consideration paid)

Case 2 (grant being a dependent asset and to be capitalized in the asset)

Asset (total cost less that portion of dependent asset which was adjusted by grants)

TO bank (or other consideration)

Case 3

Asset (Full cost)

To bank (consideration paid)

TO grant

Para 8.4 Under the other method,grantsrelatedtodepreciableassetsare treated
as deferred income which is recognised in the profit and loss statement on a
systematic and rational basis over the useful life of the asset. Such allocation
to income is usually made over the periods and in the proportions in which
depreciation on related assets is charged. Grants related to non-depreciable
assets are credited to capital reserve under this method, as there is usually
no charge to income in respect of such assets. However, if a grant related to
a non-depreciable asset requires the fulfillment of certain obligations, the
grant is credited to income over the same period over which the cost of
meeting  such  obligations  is  charged  to  income. The  deferred  income
is suitably disclosed in the balance sheet pending its apportionment to
profit and loss account. For example, in the case of a company, it is
shown after
‘Reserves  and  Surplus’  but  before  ‘Secured  Loans’  with  a  suitable

Further

11.3 The amount refundable in respect of a government grant related to a
specific fixed asset is recorded by increasing the book value of the asset or
by reducing the capital reserve or the deferred income balance, as appropriate,
by the amount refundable. In the first alternative, i.e., where the book
value
of the asset is increased, depreciation on the revised book value is provided

(so the value which was not allowed earlier to be capitalized can now be capitalized)

Para 12(2)

the  nature  and  extent  of  government  grants  recognised  in  the
financial statements, including grants of non-monetary assets given
at a concessional rate or free of cost.

I want to follow this but I need confirmation from members .

Second view point

Plus as per AS-10 ,I should be allowed to debit the non refundable taxes paid (TDS in this case)

Para 9.1 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 itsworking condition for its intended
use; any trade discounts and rebates are deducted in arriving at the purchase
price. (others mentioned in later para of the AS)

So

Asset ( @ TDS amount)

TO bank

Does all of this hold good?

Viewpoint 1 and 2 does match to some extent and discpripancies are 'cause of nature of grant

I have made certain assumptions to keep it simple, which I will clear out later

In my view, it is better to account the asset at its historical cost. (i.e Cost actually incurred to its present condition + Non refundable taxes paid, if any). AS-10 also mandates the same.

AS-12 mandatories need not be looked for as your situation does not fall into Government grants,

As per AS 12 Grant means assistance in cash or in kind , whose value can pe determined & given for specific purpose.

Grant is an assistance in cash or kind given by Central govt. ,State govt, Local Bodies , International Bodies( for example WHO), National Bodies(For example RBI)

Grant Can only be recorder if the following Condition is fullfilled which are as follows :-

1) All the conditions & stipulations related with grant have been complying by the co.

2) There will be no uncertainity regarding the realisation of the Amount of Grant from Govt.

in your provided case you didnt mention that the gift received by the co. from  any government bodies, which i mentioned above so the gifted asset will not treated as per AS 12 

the Asset will be recorded as per AS10 on historical cost basis & As per AS 10 gifted asset should be recorded at nominal value (you can say RS. 10) .