Fa conversion to invt

472 views 2 replies

CA Ritesh Garg

C A

30 Points Joined November 2008

Hi all

I wish to know whether a Fixed assets "say building used by the company in the previous years" be converted in to invetments in the books of accounts. As the business of assesee is ceased and there is no such activity in the business. Also the said building is given by the Company to its directors for residential purpose and the perks of the same were also taxed in the hands of the directors every year. We are claiming depreciation on the said building both in the Co Act and I tax Act.

Now i want to know whether the Company could convert this FA into investment, if yes, then what are the implications both under I tax & Co Act and, if not, then why not.

If not, atleast can we stop charging depreciation on the said building under both the acts.

Please support your answer.

Regards

Ritesh Garg

Replies (2)

sri rama krishna mallela

Junior Manager F&A

204 Points Joined August 2010

According to AS 10

Fixed Asset is an asset held with the intention of being used for the pupose of produsing or providing goods or services and is not held for sale in the normal course of business.

According to AS 13

Investments are assets held by an enterprise for earning income by way of

Dividends

Interest

Rentals

Capital Appriciation or

for other benefits

to the investing enterprise.

So in this case the building used earlier for production purpose is now used to stay for directors so it should be shown under investments because it is not going to be used for production and since the company is getting other benefits by letting the building to directors it is satisfied the defenition criteria of Investment.

The implication under both companies and income tax is the co can not charge depriciation on that building since it is under investment. So no tax benefit on depreciation in future.

Yogesh

Manager

50 Points Joined July 2009

It depends on the new objective of the entity i.e. business. In case business ceased to exists, then the Company can consider for liquidation accounting. In case if the entity wants to continue its business and want to sell the building then it can be considered as FA held for sale as separate line item. Under both the circustances, the value at which it will be accounted would be cost or NRV whichever is less.

However, in case if it is held for capital appreciation and it is regular course of business of the company, then it can be considered as inventory and principles of AS 2 would be applicable.

In case if the business would be to earn rental income and it is regular course of business, then it would be FA. In case of IFRS there is detail guidance under IAS 40 Investment property.

Therefore, it depends on regular course of business of the Company. In case if it is not regular course of business then it would be investment and principles of AS 13 would be applicable. Schedule VI of the Companies Act also recognise immovable property in Investment category.

However, I am not sure about treatment under income tax Act.

Hope this clarifies.