A company "ABC Ltd" has entered into joint development agreement with Compnay B whereby Co. B will construct a commercial building on the land owned by ABC Ltd. ABC Ltd will get 40% of constructed area and remaining 60% will be hwld by Co B, the developer.
ABC Ltd has earlier recorded tha land at Rs 10,00,000/- which was its historical cost and the price at which it purchased the land. Now, in the FY 2011-12, the construction is complete and in terms of the agreement, Co B has given 40% of built up area to ABC Ltd. The land owner, ABC Ltd, in turn transferred land for 60% to Co B. the value of 40% of area so received by ABC Ltd is valued at Rs. 59,00,000/-, as per valuers certificate.
Now, ABC Ltd has recorded the transaction in its books as given below-
1. It has reduced the 60% cost of land ie Rs. 6,00,000/- and shown the land value at Rs 4,00,000 in its B/sheet as on 31.03.2012.
2. It has recorded the building at Rs. 59,00,000/- as pe valuers valuation certificate.
3. the gain arising from the transaction i.e. Rs. 53,00,000/- (difference between Rs 59Lac and Rs 6 Lac) is shown as Capital reserve in the B/sheet as on 31.03.2012.
Now my query is-
Whether the treatment followed by ABC Ltd is correct in respect of recognition of profit for Rs 53,00,000/- in capital reserve instead of crediting it to P&L a/c?
ABC Ltd contends that the profit is in excess of historical caost of the land and thus it is a capital profit and not revenue profit and thus cannot be routed through P&L a/c.
Memebers reply with reasoning is expected. Also if possible, can anyone please lighten any expert opinion of ICAI on the similar query, if known?
thanks and reagrds
Sujit Taludker
CAclubindia
