New building construction

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jigna (Querist)
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17 March 2016 if any company is constructing a new factory building at another place than what kind of expense consider under that building cost

Ankur Singhal

Ankur Singhal (Expert)
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17 March 2016 Dear
Expenses incurred to build the building will constitute cost of building.
Example
Material cost
Labour cost
Electric fitting
Flooring and ceiling.
Etc.

jigna

jigna (Querist)
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23 March 2016 Thanks but can u say that electric bill paid of that new construction building in cash more than rs.20000 bcz cheque payment not allowed by pgvcl co. than that expense allowed as revenue expense

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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03 August 2024 In the context of constructing a new factory building, here’s how to classify different types of expenses and handle payments for those expenses, including those that are paid in cash:

### 1. **Expenses to be Included in Building Cost**
For a new building construction, the following types of expenses are typically included in the cost of the building and capitalized as part of the construction cost:

- **Cost of Construction**: Includes expenditures for materials, labor, and services directly related to the construction.
- **Architectural and Engineering Fees**: Professional fees for designing and planning the building.
- **Legal and Permits Fees**: Costs related to obtaining necessary permits and legal approvals.
- **Site Preparation Costs**: Expenses for clearing and preparing the construction site.
- **Cost of Fixtures and Fittings**: This includes items that become a permanent part of the building.
- **Interest on Loans**: If loans are taken for construction, the interest incurred during the construction period can be capitalized.
- **Utilities Installation**: Costs related to the installation of essential utilities like electricity, water, and gas.

### 2. **Handling Payments Made in Cash**
According to the Income Tax Act, payments exceeding ₹20,000 for expenses should ideally be made through account payee cheques, drafts, or electronic transfer. However, if the payment is made in cash due to specific constraints (e.g., company policy of the utility provider), the following points apply:

- **Revenue vs. Capital Expense**:
- **Capital Expense**: Utility installation costs directly related to the construction should generally be capitalized as part of the building cost.
- **Revenue Expense**: Routine operational expenses (e.g., ongoing utility bills for the construction site) are usually considered revenue expenses and not capitalized.

- **Tax Deductibility**: For cash payments exceeding ₹20,000, if the payment is made for a capital expense and documented properly, it can be included in the building cost. Ensure all relevant documentation, such as receipts and records, are maintained.

### 3. **Accounting and Compliance**
- **Documenting Cash Payments**: Maintain detailed records and receipts for all cash transactions. This includes obtaining a proper receipt from the utility provider.
- **Reporting**: In financial statements, ensure the construction costs are capitalized correctly. For tax purposes, ensure compliance with regulations on cash payments and reporting.

**Conclusion**: If the expense is part of the building construction cost and well-documented, it can be capitalized, even if paid in cash. However, it is crucial to maintain all documentation to justify the expenditure and to comply with tax regulations.

If you need further assistance or have specific details regarding the expenditure, please let me know!