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Depreciation on buildings given up for real estate development

sudharsan (40) (162 Points)

28 July 2016

Hi All, Our client had given a portion of his premises for development to third party. In that premises- some buildings are available. As per the agreement with him, they have to vacate within 1 year from the date of agreement. Then they demolish the buildings and construct the plots. So now my query is whether we have to revise the useful life of buildings to 1 year and depreciate fully based on that life or is any special treatment is there for buildings given up for development to third party? Please suggest. Regards Sudharsan P

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6 Replies

CA Amrita Chattopadhyay (Audit & Assurance) (13459 Points)
Replied 28 July 2016

From the descripttion which has been provided it is understood that the building is kind of temporary structure which is used for the construction of the building. As per the Companies Act, the temporary structure is to be depreciated within period of 3 years. However as per Income Tax Act, 1961 100% depreciation can be claimed on such assets

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sudharsan (40) (162 Points)
Replied 28 July 2016

Hi,

No the buildings were not temporary structures. The Buildings(factory) were used in the production of goods and services before.Now since my client has decided to develop the property, he had entered an agreement with developer to demolish the existing factory buildings and construct the plots.

CA Amrita Chattopadhyay (Audit & Assurance) (13459 Points)
Replied 28 July 2016

The buidling has to be written off from the books in such case instead of charging depreciation.

sudharsan (40) (162 Points)
Replied 04 August 2016

Hi ,

Thanks for replying. Could you please your clarify for the below qeustions.

Say A Ltd had entered an agreement with B Ltd to develop the land by constructing the plots and sale on 31.03.2015. As per the agreement,they will share the revenue proceeds from sale of plots in the ratio of 50:50 by both A Ltd & B Ltd. The construction is going to complete by 31.03.2016. The booking of plots will begin from 01.04.2016. These type of agreements are common in now-a-days that the owner provides the land and developer develops and revenue proceeds are shared by both of them. Now my query is w.r.t to accounting in the books of Land owner as in developer books it is dealt by Guidance note issued by ICAI.

Q.1:- The land owner had paid some fees(Say 50L) to agent X Ltd to find out suitable developer on 31.03.2015. Now Shall I charge off this expenditure for the FY 2014-15 or in FY 2016-17 when the revenue starts?

Q.2:- Whether the same fees paid to XLtd shall be added to Land cost-since due to this agreement,it is probable that economic benfits will flow to the entity which is more than if only land is sold out to any buyer.

Q.3:-Supoose tha land measures about 10 acres on which plots are constructed. Say Total 100 plots are constructed and in FY 2016-17- 50 plots are sold out. The proportionate land area in builtup was 5 acres. For FY 2016-17- whether only half of the carrying amount of land(5 acres) should be deducted from Revenue and transfer to capital Reserve.

Sudharsan P

CA Amrita Chattopadhyay (Audit & Assurance) (13459 Points)
Replied 05 August 2016

Q1: Since the company is formed, the fees can be charged to preliminary expenses even though the operations has not started. Preliminary expenses can be incurred in 2014-15. Preliminary expenses can be written off against the income / operations starts in the 2016-17 in a systematic manner.

Q2: In your case, the land is not fixed asset but it is inventory as you are trading with land. The fees paid needs to be shown separately instead of adding it to land cost. The land cost would be inflated if the fees are also added. For the purpose of capital expenditure, you could have added it with land cost.

Q3: I am not very sure about this adjustment. Would come back to you after some research.

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sudharsan (40) (162 Points)
Replied 09 August 2016

Hi,

Thank you for reverting to my queries. I want to add the following information/views for your answers.

Q1. The company was formed way back in 2000. It was not newly formed. Erst while on the same land- they were

running their own factory. Now now since the land prices have gone up, they want to vacate and develop for sale. It was the top management strategy for further growth of the company. Then taking to preliminary expenses may not be correct.

Q2. The land which we are selling cannot come under the purview of trading as we are not in that business of selling and buying but it is just like selling a Non-current asset. Then it may not be termed as Inventories also.

Regards

Sudharsan P