Pre-operative exp
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
03 December 2010
Can we capitalise the Indirect expenditure i.e salary , t&A and other cost of person who are directly associated with Project. If yes then would there any concern in Income tax asst point of view.
10 August 2024
Yes, it is generally permissible to capitalize certain indirect expenditures associated with a project under construction, including salaries, travel and accommodation (T&A), and other costs related to individuals directly involved in the project. However, there are specific guidelines and considerations you need to be aware of:
### **Capitalization of Indirect Expenditures**
#### **1. **Types of Expenditures:**
- **Salaries and Wages:** Salaries of employees who are directly engaged in the construction or project development can be capitalized. This includes direct labor costs for those who work specifically on the project.
- **Travel and Accommodation (T&A):** Costs incurred for travel and accommodation of individuals directly associated with the project can be capitalized if they are necessary for the execution of the project.
- **Other Directly Attributable Costs:** Other costs that can be directly attributed to the project, such as project-specific utilities or materials, can also be capitalized.
#### **2. **Accounting Standards and Guidelines:**
- **International Accounting Standards (IAS) / Indian Accounting Standards (Ind AS):** According to IAS 23 (Borrowing Costs) and Ind AS 23, borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset are to be capitalized. Similarly, costs that are directly attributable to the project can be capitalized.
- **Accounting Standard (AS) 16 - Borrowing Costs:** This standard under Indian GAAP also supports the capitalization of borrowing costs if directly attributable to the project.
#### **3. **Income Tax Considerations:**
- **Tax Treatment:** From an Income Tax perspective, capitalization of indirect expenses related to a project is generally acceptable, provided these costs are directly attributable to the construction or development of a capital asset.
- **Section 32 of the Income Tax Act:** The Income Tax Act allows capitalization of costs related to the construction of assets. These costs are considered part of the cost of the asset and are not deductible as current expenses.
- **Documentation and Justification:** Ensure that proper documentation is maintained to justify that these expenditures are directly related to the project. This includes maintaining detailed records of the time spent by employees, nature of travel, and other relevant details.
#### **4. **Practical Steps:**
1. **Segregate Costs:** Clearly segregate direct costs from indirect costs. Only those indirect costs directly attributable to the project should be capitalized.
2. **Maintain Records:** Keep detailed records and supporting documentation for all capitalized costs, including timesheets, invoices, and travel expenses.
3. **Allocate Costs:** Allocate indirect costs proportionately to the project based on a rational basis. For example, if an employee spends 50% of their time on the project, 50% of their salary can be capitalized.
4. **Consult Professional Advice:** It is advisable to consult with a tax professional or auditor to ensure compliance with accounting standards and tax regulations.
### **Summary:**
- **Capitalization:** Yes, indirect expenditures such as salaries and T&A related to individuals directly associated with a project can be capitalized.
- **Income Tax Perspective:** Capitalization is generally accepted, provided the costs are directly attributable to the construction or development of the asset.
- **Documentation:** Ensure thorough documentation and justifications to support the capitalized amounts.
Maintaining proper records and adhering to accounting standards and tax regulations is crucial to ensure compliance and to avoid any issues during tax assessments.
### **Capitalization of Indirect Expenditures**
#### **1. **Types of Expenditures:**
- **Salaries and Wages:** Salaries of employees who are directly engaged in the construction or project development can be capitalized. This includes direct labor costs for those who work specifically on the project.
- **Travel and Accommodation (T&A):** Costs incurred for travel and accommodation of individuals directly associated with the project can be capitalized if they are necessary for the execution of the project.
- **Other Directly Attributable Costs:** Other costs that can be directly attributed to the project, such as project-specific utilities or materials, can also be capitalized.
#### **2. **Accounting Standards and Guidelines:**
- **International Accounting Standards (IAS) / Indian Accounting Standards (Ind AS):** According to IAS 23 (Borrowing Costs) and Ind AS 23, borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset are to be capitalized. Similarly, costs that are directly attributable to the project can be capitalized.
- **Accounting Standard (AS) 16 - Borrowing Costs:** This standard under Indian GAAP also supports the capitalization of borrowing costs if directly attributable to the project.
#### **3. **Income Tax Considerations:**
- **Tax Treatment:** From an Income Tax perspective, capitalization of indirect expenses related to a project is generally acceptable, provided these costs are directly attributable to the construction or development of a capital asset.
- **Section 32 of the Income Tax Act:** The Income Tax Act allows capitalization of costs related to the construction of assets. These costs are considered part of the cost of the asset and are not deductible as current expenses.
- **Documentation and Justification:** Ensure that proper documentation is maintained to justify that these expenditures are directly related to the project. This includes maintaining detailed records of the time spent by employees, nature of travel, and other relevant details.
#### **4. **Practical Steps:**
1. **Segregate Costs:** Clearly segregate direct costs from indirect costs. Only those indirect costs directly attributable to the project should be capitalized.
2. **Maintain Records:** Keep detailed records and supporting documentation for all capitalized costs, including timesheets, invoices, and travel expenses.
3. **Allocate Costs:** Allocate indirect costs proportionately to the project based on a rational basis. For example, if an employee spends 50% of their time on the project, 50% of their salary can be capitalized.
4. **Consult Professional Advice:** It is advisable to consult with a tax professional or auditor to ensure compliance with accounting standards and tax regulations.
### **Summary:**
- **Capitalization:** Yes, indirect expenditures such as salaries and T&A related to individuals directly associated with a project can be capitalized.
- **Income Tax Perspective:** Capitalization is generally accepted, provided the costs are directly attributable to the construction or development of the asset.
- **Documentation:** Ensure thorough documentation and justifications to support the capitalized amounts.
Maintaining proper records and adhering to accounting standards and tax regulations is crucial to ensure compliance and to avoid any issues during tax assessments.
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