1.35  Query:    

Accounting treatment of expenditure incurred on development of leasehold land.

1. A central public sector undertaking, under the administrative control of Ministry of Railways, was incorporated on 10^th March, 1988, under the Companies Act, 1956. The main object for which the company is established is to carry on the business of multimodal transport operators, general carrier of international and domestic cargo within India and abroad by all modes and mixes, i.e., road , rail, sea, air, inland water transport and ropeways by setting up Inland Container Depots (ICDs) and Container Freight Stations (CFSs) at suitable and feasible locations for facilitating export from inland locations (as provided under Main Objects of the Memorandum of Association of the company).

2. In November 1989, the company took over ICDs established earlier by Indian Railways (IR) and now operates ICDs, CFSs and Port Side Container Terminals (PSCT) on land leased from IR. It plays a pivotal role in creation of strong infrastructure for multimodal transport. The company is the only entity in the country to handle container traffic at ICDs.

3. To begin with, the company undertook construction of most modern and state-of-the-art ICD at Tughlakabad, Delhi, on the land provided by IR on lease basis, which was completed and commissioned on 1^st September, 1993.

4. The querist has stated that the accounting policy for treatment of expenditure incurred during construction period is as follows:

“Expenditure during construction period is included under ‘Capital Work-in-progress’ and the same is allocated to the respective Fixed Assets on completion of construction period.”

5. In pursuance of the above accounting policy, the expenditure incurred in connection with and incidental to the setting up of the ICD at Tughlakabad, Delhi, was accounted for under the head ‘Capital Work-in-progress’ till its completion. After its completion , the expenditure incurred under the project was capitalised accordingly.

6. During the financial year 1993-94, disclosure was made in regard to capitalisation of the container depot at Tughlakabad under Schedule 3 – ‘Schedule of Fixed Assets’. The expenditure incurred was capitalised under the heads Leasehold Land, Buildings, Plant & Machinery and Land Development Expenses. The expenses incurred for shifting the high tension cables passing across the construction site, expenses incurred for the development of the land for construction of the ICD and expenses on earth work were capitalised under the head ‘Land Development Expenses’.

7. The accounts for the year 1993-94 were closed, and reported upon by the statutory auditors and with the ‘NIL’ comments from Comptroller & Auditor General of India (CAG) Office. After adoption of audited accounts by the shareholders, the annual report comprising the Directors’ Report along with audited accounts was placed before the Parliament as per the requirement.

8. During 1994-95, Member, Audit Board (MAB) issued Half Margin on ‘Land Development Expenses’- Rs. 1,70,48,848/-), which runs as under: -

                        “Balance Sheet

                        Fixed Assets (Schedule- 4)

                        Land Development Expenses- (Rs. 1,70,48,848/-)

It represents the earth work done and the amount paid to DESU for shifting high-tension cables in respect of ICD, Tughlakabad, a land not owned by the Company. As such, this amount cannot be capitalised but can be treated as deferred revenue expenditure to be amortised within a specified period, say 10 years.”

9. The above mentioned Half Margin was replied by the company which states that “the amount booked under the head ‘Land Development Expenses’ of Rs. 1,70,48,848/- represents (a) Rs. 76,68,560/- towards earth work and (b) the balance amount of Rs. 93,80,318/- represents shifting of high tension cables passing across at the ICD, Tughlakabad. This expenditure pertains to the year 1993-94 and the same was shown under Fixed Assets under the heading ‘Land Development Expenses’ during that year.”

10. The view of the government auditors was that this amount cannot be capitalised in view of the fact that the land is not being owned by the company, and hence this amount should be treated as ‘Deferred Revenue Expenditure’. This transaction pertains to the year 1993-94 and accounts of that year have been audited, published and put up to all concerned. In this regard, it is mentioned that the entire work done at ICD, Tughlakabad, is on land not owned by the company. The structures and facilities are owned by the company and the company is getting the benefit of these facilities. Similarly, the company will get benefit of the shifting of DESU lines and this benefit is of enduring nature. Accordingly, this expenditure has been rightly capitalised.

11. During discussions with the government auditors, in view of difference of opinion in the matter, it was decided that this case could be referred to the Expert Advisory Committee of the Institute of Chartered Accountants of India, for their expert opinion in the matter. The facts of the query have been further explained by the querist in the following paras.

12. For setting up and running of ICD at Tughlakabad, it was essential to make the land suitable for construction and the development of ICD. The land leased by Railways to the company at Tughlakabad was uneven and rocky. It was absolutely necessary to do earth work by way of blasting process. Since heavy duty cranes are to be used for handling of containers, a strong surface was required. To this end, a lot of earth work was done. Land development expenses include levelling of uneven area, removing of rocky strata, removal of tree stumps and other operation of permanent nature. Further, Delhi Electricity Supply Undertaking’s (DESU) high tension cables were passing across the construction site and DESU was requested to shift the cables from the site. For these activities, the following expenditure was incurred: -

            (a)        Rs. 76,68,560/- towards various earth work;

            (b)        Rs. 93,80,318/- towards shifting of high tension cables.

(i)         Whether expenses incurred on land development which are of permanent nature and enduring advantage to the company should be capitalised or should be treated as deferred revenue expenditure keeping in view the fact that the land belongs to the IR and has been leased by it to the company for construction of Inland Container Depot.

(ii)        Whether depreciation should be provided in the accounts on such expenditure.

                                                                        Opinion                                         March 3, 1997

1. The Committee notes that para 9.6 of the Guidance Note on Treatment of Expenditure During Construction Period, issued by the Institute of Chartered Accountants of India, inter alia, recommends as below:

“As regards…….. the expenditure on levelling and grading the land, it is submitted that this can be treated as an indirect cost of construction rather than as an additional cost relating to the land itself, having regard to the primary purpose for which this expenditure is incurred. Wherever possible, the expenditure on levelling, clearing and grading the land should be related with, and added to, the cost of the particular buildings or other structures which stand on each particular piece of land. Where this is not practicable, the total expenditure on levelling, clearing and grading the land may be apportioned among the different buildings and structures standing on the land in the ratio of the respective areas occupied by each such building or structure, or in any other suitable ratio. What is stated above in this context is not intended to imply that only that portion of the expenditure on levelling, clearing and grading the land can be capitalised, as an indirect cost of construction, which relates to the area of the land actually occupied by a building or other structure. It is recognised that, in practice, it may not be possible to occupy the entire land area by constructing a building or other structures thereon. If the entire land is reasonably occupied by buildings and other structures and if the expenditure on levelling, clearing and grading the land is reasonably incurred for the purpose of the construction, such expenditure can be treated entirely as an indirect cost of construction and capitalised as part of the cost of the buildings or other structures. However, any part of the expenditure on levelling, clearing and grading the land which is incurred for purposes of landscaping or for any other purposes, not connected with the construction of the project, should be treated as part of the cost of land……..”

 2. The Committee notes that the above paragraph of the Guidance Note lays down the principle of capitalisation of expenditure incurred on land to make it fit for construction of assets thereon. Without incurring the expenditure of the nature specified in the aforesaid paragraph, the assets on the land cannot be constructed. Thus, the focus of the expenditure incurred on land, for the purpose of capitalisation of such expenditure, is not the land itself but the assets constructed thereon. Therefore, it does not make any difference whether the land is freehold or leasehold. The Committee is of the view that with regard to the expenditure incurred on shifting of the high-tension wires from the site the same principle is applicable since the ICD would not have come into existence unless this was done. Thus, the expenditure incurred on levelling of land and shifting of high-tension wires should be capitalised as part of the cost of the assets constructed on the land, which are owned by the company, and depreciation charged appropriately.

                        (i)         Please see para 2 above.

                        (ii)        Please see para 2 above.

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