Query No. 10 Subject: Accounting treatment of
proceeds from leasing of land.1
A. Facts of the Case
1. A wholly owned government company has the main objective of setting up and running agricultural farms for the production of seeds of food grains, fibre crops, plantation crops, oilseeds, vegetables and fruits, etc.
2. A building was purchased by the Government of India at a cost of Rs. 2 lac alongwith the adjoining land of about 15 acres, in the year 1957. At the time of the formation of the company in the year 1969, the cost of the building was paid by the company to the Government of India. The querist has stated that the mutation of the same in favour of the company is pending.
3. At the time of acquisition by the company, the land was barren and away from the town. However, with the passage of time, it became prime commercial land and a master plan for building a commercial complex on the land was developed. Since the year 1990, shop plots of this complex are being given on perpetual lease every year to different parties by open auction. The proceeds from leasing of plots are shown as income in the profit and loss account of the company under the head ‘Other Income’, and described as ‘Leasing of Shopping Complex’.
4. According to the querist, the above treatment is in line with paragraph 8 of Accounting Standard (AS) 5, ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’, issued by the Institute of Chartered Accountants of India. The said paragraph states that “extraordinary items should be disclosed in the statement of profit and loss as a part of net profit or loss for the period. The nature and amount of each extraordinary item should be separately disclosed in the statement of profit and loss in a manner that its impact on current profit or loss can be perceived”.
5. The municipal corporation has been charging stamp duty on the total value of sale. The gain from sale of land is being included under the head 'capital gain' for purposes of income-tax.
6. The lease rent which is a nominal amount is also being received by the company every year and is being accounted for on actual receipt/accrual basis during the year.
7. As per the querist, the above accounting treatment has been followed since the year 1990-91 and has been accepted by the statutory auditors as well as the government auditors. However, during the audit of accounts for the year 1998-99, the government auditors have commented as under:
“Other Income (Schedule 16) Rs. 308.29 lac. The above includes Rs. 115.44 lac being the premium received as a result of the shopping complex being given away on perpetual lease (99 years). Thus, instead of treating the whole amount as income for the year, the company should have spread this amount over 99 years and treated only Rs. 1.17 lac as income for the year. The balance Rs. 114.27 lac should have been shown as deferred income under the head ‘Reserves and Surplus’. The treatment given by the company has resulted in under-statement of Reserves and Surplus as well as the loss to the extent of Rs. 114.27 lac each.”
B. Query
8. The querist has sought the opinion of the Expert Advisory Committee on the treatment of proceeds from leasing of plots.
C. Points Considered by the Committee
9. The Committee notes paragraph 17(b) of Accounting Standard
“17(b) Substance over form The accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely by the legal form.”
10. The Committee notes that the plots of land are given by the company on perpetual lease, i.e., for a period of 99 years. The Committee is of the view that taking into account the long period of lease and prevalent commercial practice in India of lease being generally renewed at the end of the lease period, in substance, the lease of land in this case amounts to passing of the significant rights of ownership to the parties concerned. In this regard, the Committee also takes note of the requirement of Schedule VI to the Companies Act, 1956, of showing leasehold land as an asset of the lessee. This requirement, according to the Committee, is a recognition of the principle of ‘substance over form’.
11. Accounting Standard (AS) 5, ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’, defines the terms ‘ordinary activities’ and ‘extraordinary items’ as follows:
“Ordinary activities are any activities which are undertaken by an enterprise as part of its business and such related activities in which the enterprise engages in furtherance of, incidental to, or arising from, these activities.”
“Extraordinary items are income or expenses that arise from events or transactions that are clearly distinct from the ordinary activities of the enterprise and, therefore, are not expected to recur frequently or regularly.”
The Committee is of the view that the sale of plots constitutes an ordinary activity of the company and not an extraordinary item.
12. Paragraph 12 of AS 5 requires that “when items of income and expense within profit or loss from ordinary activities are of such size, nature or incidence that their disclosure is relevant to explain the performance of the enterprise for the period, the nature and amount of such items should be disclosed separately”. The Committee is of the view that the transactions of sale of plots would need a separate disclosure within profit or loss from ordinary activities if the amount involved is material under the facts and circumstances of the case.
13. It may be mentioned that the cost of plots sold would need to be charged to the profit and loss account to achieve a proper matching of costs and revenues.
D. Opinion 14. On the basis of the above, the Committee is of the opinion that the treatment of proceeds from leasing of plots as income in the profit and loss account of the company is appropriate. The nature and amount of such income should be disclosed separately within profit or loss from ordinary activities if the amount involved is material under the facts and circumstances of the case. The cost of the plots given on lease should be charged to the profit and loss account.
1Opinion finalised by the Committee on 22.4.2000. |