A. Facts of the Case

1. A government company made an application to Land and Development Office (L&DO), Ministry of Urban Development, Government of India, for allotment of land for construction of office building. The L&DO allotted a piece of land vide allotment letter dated 1st May, 2000, for a sum of Rs.30,91,20,386. The company paid the amount on 11th May, 2000, and took the possession of the land on 27th March, 2001, on ‘as is and where is’ basis and capitalised the amount so paid as ‘Land’ in its books as on 31st March, 2001. The condition (ix) of the letter of allotment, inter alia, provides that "the plot will initially be on licence under an agreement and upon successful fulfillment of the terms of the contract lease will be given. The lease will, however, commence from the date of allotment". Further, as per condition (xiii) of the above letter, it is provided that the company shall execute the Memorandum of Agreement and Lease Deed at its own cost.

2. The company entered into a Memorandum of Agreement (MOA) with L&DO on 5th February, 2002, on terms and conditions stated therein. Clause

7. The C&AG has commented that the company has not provided for stamp duty liability of Rs. 4.02 crore (based on the prevailing rate) even though the deposit paid towards the cost of land has been booked under ‘Fixed Assets – Land’.

8. The company is, however, of the view that in terms of clause (i) and (xix) of MOA, the liability in respect of stamp duty shall accrue and arise only on the execution of the lease deed, which shall be granted by the President only upon the completion of the building in accordance with the terms of MOA. Hence, the stamp duty needs to be provided only on completion of building/execution of lease deed.

B . Query

10. The Committee notes that the issues raised by the querist relate to the accounting treatment for the amount paid as security deposit towards acquisition of land and that in case it is decided to capitalise it as ‘Land’ whether provision for stamp duty payable on execution of lease is required to be made immediately or on execution of the lease deed. The Committee restricts its opinion on these issues only and, accordingly, has not addressed other issues which may arise in connection with the transaction, e.g., the propriety of capitalising all components of the amount payable as cost of land.

11. The Committee notes that one of the major considerations governing the selection and application of accounting policies is ‘substance over form’. Accounting Standard (AS) 1, ‘Disclosure of Accounting Policies’, issued by the Institute of Chartered Accountants of India, explains the said term as "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" [paragraph 17(b)]. The Committee is of the view that the aforesaid consideration of substance over form has been followed in paragraph 9.6 of the Guidance Note on Treatment of Expenditure during Construction Period, issued by the Institute of Chartered Accountants of India, while recommending the treatment of the security paid to government agencies in respect of land. The relevant extract of the paragraph is reproduced below:

"9.6 The expenditure on land would represent an element of cost common to all new capital projects – large or small. The matter, however, is not entirely simple and therefore some elaboration is necessary. Obviously, any consideration paid directly for the purchase of land would have to be capitalised and accounted for separately as the cost of land. In a large number of cases, the land is not purchased outright but is acquired with the help of various Government agencies under the relevant laws relating to land acquisition, which aim at enabling essential industries to obtain land at a reasonable cost without the risk of being, in effect "black mailed" by a few landholders who refuse to sell their property, thereby defeating the purpose of acquiring other tracts of land adjacent to, or surrounding, that property. Where the land is acquired in this manner, the cost of acquisition would usually represent deposits paid to, or through, the relevant Collector or other Government agency. The amounts so paid may be shown in the balance sheet as cost of land, provided that, in appropriate circumstances, a suitable note is given indicating that the cost of land represents the value of deposits paid up to date for land acquisition purposes, which would be adjusted when the final value of land is determined and thetitle to land is transferred to the company...."

12. The Committee is of the view that in the present case also by applying the consideration of ‘substance over form’, it is apparent that the security deposit paid to the Land and Development Office is for the purpose of acquiring, on perpetual lease, the land on which the company would construct its premises. In view of this, it would be appropriate to treat the said amount paid as ‘Leasehold land’ in the balance sheet with appropriate disclosure of the nature of this item in the notes to accounts, e.g., the disclosure may be that the amount has been paid as security deposit to obtain the land on perpetual lease and the lease deed would be executed on completion of construction of building.

13. The Committee notes the following definition of ‘provision’2given in the ‘Guidance Note on Terms Used in Financial Statements’, issued by the Institute of Chartered Accountants of India:

14. The Committee also notes the following definition of the term ‘liability’ as per paragraph 49 of ‘Framework for the Preparation and Presentation of Financial Statements’, issued by the Institute of Chartered Accountants of India:

"A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits."

 

15. The Committee is of the view that the stamp duty payable by the company on execution of lease deed is a ‘present obligation’ since by agreeing to construct the building on the land in question, the company has no option but to pay this amount on execution of the lease deed to become the lessee of the land. Accordingly, the Committee is of the view that the company should create a provision for the stamp duty at the prevailing rate and capitalise the same as part of the cost of ‘Leasehold land’ in its books of account. Any change in the stamp duty at the time of execution of the lease deed should be adjusted as a change in accounting estimate within the requirements of Accounting Standard (AS) 5, ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’.

D. Opinion

16. On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 9 above:

(i) In the facts and circumstances of the query, the amount paid to government for acquisition of land should be treated as ‘Leasehold land’ in the balance sheet of the company with appropriate disclosure in the notes to the accounts regarding the nature of the payment made.

(ii) The provision for stamp duty at the prevailing rate should be made by the company at the time of capitalisation of the amount paid for acquisition of land. The amount of provision so made should be capitalised as part of the cost of ‘Leasehold land’.

1Opinion finalised by the Committee on 25.3.2003.