11 May 2010
my assessee is educational trust running school and college..it started new school building construction by purchasing land worth rs.90 lakhs by taking loan of rs.85 lakhs,and construction of only 5 lakhs has been made on building..interest is around 7 lakhs..my question is that whether land in this case will be considered as qualifying assets. my doubts is according to definition land doesnt take substantial period of time to be ready for use, its already ready..the qualifying asset is school building actually..so int to be capitalised is sholud be in proportion of expenses incurred.
12 May 2010
1. It's a rebuttable assumption that something which is more than 12 months is a substantial unless otherwise justified.
2. As per AS-16 Borrowing costs are capitalised as part of the cost of a qualifying asset when it is probable that they will result in future economic benefits to the enterprise and the costs can be measured reliably.
3. The amount of borrowing costs eligible for capitalisation on that asset should be determined as the actual borrowing costs incurred on that borrowing during the period less any income on the temporary investment of those borrowings.
4. AS-16 specifically states the following:
If borrowing costs incurred while land is under development are capitalised during the period in which activities related to the development are being undertaken. However, borrowing costs incurred while land acquired for building purposes is held without any associated development activity do not qualify for capitalisation.
For the above assessment you can make a judgment that - you can justify that land is a qualifying asset and the actual cost of borrowing is capitalised
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