31 March 2012
My client is Builder. He has land in his inventory. Now he has sold development rights of that land to some other developer. As per agreement, my client has to transfer the land also after 3 years (i.e. Once the construction completed on that land).
My client has upfront received the full consideration for development rights and for that land both at the time of selling of development rights. Now my query is the land is still reflecting in the balance sheet of my client and which will remain for next 3 years in my client's balance sheet only. I just want to know the what would be the accounting entries (for rights and land) in the books and what will be the tax implications?
Land is in inventory, so it will be business gain and not capital gain.
Please reply at the earliest and if possible please quote some case laws in support of your reply.
31 March 2012
Since the land is an inventory here, please see the accounting policy of the Company. If it says revenue is recognised when the significant risks and rewards are transferred, then the revenue has to be recognised in books and land has to be derecognised. From the information given by you, since the land development rights are transferred, it seems signficant risks and rewards are transferred and only registration is pending which is a formal procedure. However, that doesnot stop recognition of revenue. In income tax, it will be taxed as a Business income.
What Kishoreji has said is absolutely correct. Please refer the accounting policy used by the company. Secondly, your questions seems to ask for 2 treatments, 1 for Income Tax & 2nd for Accounting (ie Co LAW). There will be a different treatment for both!
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