Expert Advisory Committee
ICAI-Expert Advisory Committee
Options:

1.9   Query:  

   Treatment of profit on surrender of leasehold rights.

 

1. ‘X’ company was holding leasehold rights in respect of a property. The said right arose by virtue of a lease agreement entered into by ‘X’ company with ‘Y’ company, initially for a period of 30 years with an option to renew the contract for a further period of 30 years. ‘X’ company did not incur any expenditure for acquiring the above –said lease.

 

2. ‘Y’ company sold the property to an outsider (subject to lease subsisting in favour of ‘X’ company). The unexpired right in the said leasehold property was surrendered to the lessor by ‘X’ company and it received a substantial consideration therefore.

 

3. The consideration received by ‘X’ company for surrender of leasehold right, being a capital receipt, was credited directly to capital reserve and shown as such in the balance sheet of ‘X’ company. Further, notes forming part of balance sheet of ‘X’ company carried the following observation:

 

“During the year the company ahs surrendered its leasehold rights in the property and the amount realised on the surrender of lease has been credited to Capital Reserve.”

 

4. The querist has sought the opinion of the Expert Advisory Committee on the following issues arising from the above:

 

(a)        Whether crediting of the consideration received on surrender of leasehold rights directly to capital reserve is in accordance with the normal accounting standards.

 

(b)        Whether crediting of the consideration received directly to the capital reserve is in accordance with Schedule VI to the Companies Act,

 

Opinion                                           November 11, 1993

 

1.  The Committee notes that Part II of Schedule VI to the Companies Act, 1956, requires in clause 2(b) that the profit and loss account “shall disclose every material feature, including credits or receipts and debits or expenses in respect of non-recurring transactions or transactions of an exceptional nature.” The Committee is of the view that aforesaid requirement requires receipts/credits, to be disclosed in the profit and loss account, irrespective of their nature, i.e., whether capital or revenue.

 

2.  On the basis of the above, the Committee is of the opinion that the amount received on account of surrender of leasehold rights should be disclosed in the profit and loss account.

________________________