A. Facts of the Case
1. A Government of India enterprise incorporated under the
Companies Act, 1956, is engaged in the business of transmission
of power from the generating units to different State Electricity
Boards through its transmission network. With the growing
investment in power sector, it also undertakes construction of new
transmission system linked with the generating units as well as
system strengthening schemes of the existing networks. A
transmission system consists of transmission lines, sub-stations
for transmitting the power and switchyards at generating units.
2. The querist has stated that the transmission line sometimes
passes through forest area for which approval of Ministry of
Environment and Forest (MOEF), Government of India, under
Forest (Conservation) Act, 1980, is mandatory. As per the
stipulations of the Forest (Conservation) Act, compensatory
afforestation on equivalent non-forest land or on degraded forest
land (twice the forest area diverted/used) is a pre-condition for all
diversion of forest land for non-forest purpose. While granting
approval, MOEF letter stipulates that tree cutting shall be restricted
to tower footing and 3-7 meter corridors below each conductor
depending upon the type and line voltage. Accordingly, towers are
erected at varying distance and stringing of conductor is made
among the various towers. Trees are uprooted at places where
the towers are erected which occupy a space of approx. 400 sq.
meters and in corridors of 3 to 7 m in the entire stretch of line. In
rest of the stretch, trees are lopped/trimmed or sometimes cut to
maintain desired electric clearance. However, approval is obtained
for use of forest area based on complete right of way (ROW). One
such case of construction of transmission line is referred by the
querist for the opinion of the Expert Advisory Committee. In the
approval letter dated 10th January, 2003 it has been agreed that
63.960 hectare of forest land shall be diverted on 30 years lease
subject to fulfillment of the following conditions:
(i) The user agency shall transfer the cost of compensatory
afforestation and its maintenance over double the
degraded forest land, i.e., 127.92 ha. to the State Forest
Department.
(ii) The right of width is allowed to 23 meters and the
clearance between conductor and trees to 5.5 meters.
(iii) The user agency shall prepare a plan for plantation of
small size tree species below the transmission line for a
period of five years and transfer the cost to the State
Forest Department.
(iv) The user agency shall ensure the minimum felling and
the maximum height of the towers in the forest area.
The financial implication of the above conditions is Rs. 49.06 lakh
as required to be paid by the company to the Forest Department,
communicated vide letter dated 13th February, 2003.
3. The querist has further stated that the company is required to
pay lease premium of Rs.1.38 crore for transfer of land on lease
for a period of 30 years for construction of the above project.
Apart from this, 10% of lease premium, i.e., Rs. 13.78 lakh is
required to be paid annually as lease rent over a period of 30
years.
4. The querist has also stated that the Hon’ble Supreme Court
has ordered that the projects be charged net present value of
benefits from a forest, including, oxygen production, biodiversity,
carbon absorption and flood and drought control. This is over and
above the current system of compensatory afforestation, paying
for cutting the trees and getting new ones planted. A sum of Rs.
5.88 crore has been paid by the company @ Rs. 9.20 lakh per
hectare for 63.96 hectare of forest land as required vide letter
dated 19/11/2003.
5. As per the querist, after the compliance of above conditions,
the land is diverted to the company for a period of 30 years. Such
lease gives right to use the land for the specific purpose and
contains various conditions restricting the usage of land, such as:
(i) Legal status of land shall remain unchanged.
(ii) No damage is to be caused to forest property and wildlife
by employees of the company or its contractors.
(iii) The company shall have right to use the land within the
lease period for the specific project only.
There are many other conditions, which restrict the use of land so
that minimal loss to forest and wildlife is caused and the same are
given in the letter dated 15th June, 2004.
6. The querist has stated that the company treats the expenditure
stated above as incidental expenditure during construction, directly
attributable to construction of transmission line and accordingly,
such payments are capitalised as part of the cost of the transmission
line. The lease rent stated above, paid after commissioning of the
line is charged to revenue. According to the querist, the above
accounting treatment is based on the following:
(i) Paragraph 9.1 of Accounting Standard (AS) 10,
‘Accounting for Fixed Assets’, issued by the Institute of
Chartered Accountants of India, states, inter alia, that
the cost of an item of fixed asset comprises its purchase
price and any directly attributable cost of bringing the
asset to its working condition for its intended use. The
cost of site preparation is an item of directly attributable
cost.
(ii) Paragraph 9.3 of AS 10, inter alia, provides that the
administration and other general overhead expenses are
usually excluded from the cost of fixed assets. However,
in some circumstances, such expenses as are specifically
attributable to construction of a project or to the acquisition
of a fixed asset or bringing it to its working condition,
may be included as part of the cost of the fixed asset.
7. The Comptroller and Auditor General of India (C&AG), while
conducting the audit of the company for the financial year 2004-
05, pointed out that the expenditure incurred by the company as
compensatory afforestation charges (i.e., payments referred to in
paragraphs 2 and 4 above only) resulting in the plantation of trees
by the Forest Department would be the property of the Forest
Department and is not represented by any tangible asset of the
company and, therefore, inclusion of such expenditure under capital
cost of transmission line is not correct. The C&AG is of the opinion
that such amount is required to be accumulated under a separate
account head indicating its nature until the commencement of
commercial operation of the transmission system and should be
written-off/amortised as per the company’s accounting policy which
states that “Capital expenditure on assets not owned by the
company is amortised over a period of four years from the year in
which the first line/substation of the project comes into commercial
operation and thereafter, from the year in which the relevant assets
are completed and become available for use” (emphasis supplied
by the querist).
8. In addition to above, the Government auditor has also made
a reference to query no. 1.32 of Compendium of Opinions, Volume-
1X. The query relates to treatment of capital expenditure on land
not belonging to the company and not represented by tangible
assets, e.g., building-up and maintenance of roads, bridges,
culverts, etc., on land not belonging to the company. The querist
has stated that in respect of this query, the Expert Advisory
Committee (EAC) has opined that, expenditure incurred on creation
of various facilities not belonging to the company though of capital
nature should be disclosed separately and accumulated in a
separate account until the commencement of commercial operations
of the project. Thereafter, it should be written-off to the profit and
loss account as recommended in the Guidance Note on Treatment
of Expenditure during Construction Period2, i.e., over the
approximate period of its utility or over a relatively brief period not
exceeding five years, whichever is less.
9. The company, in its reply, has stated that the compensatory
afforestation charges paid to forest authorities are for getting
clearance for construction of transmission line in the forest area.
Since the expenditure is directly attributable and is a necessary
expense for the construction of transmission line in the forest
area, the expenditure necessarily should be included in the cost of
transmission line only. The accounting treatment is based on
paragraphs 9.1 and 9.3 of AS 10. The accounting policy referred
to by the C&AG has been framed to account for building-up and
maintenance of approach roads, expenditure on community
development, bridges and culverts, etc. on land not belonging to
the company. Such expenses facilitate the project or are taken up
as welfare measure and are not a pre-condition imposed for taking
up construction work. The auditor was also informed that the querist
of query no. 1.32, published in the Compendium of Opinions,
Volume-IX, had again referred the matter to the EAC stating that
the general policy (as opined in volume-IX) may not be applicable
in all cases and circumstances and in particular, it may not be
applicable to the hydro-electric projects. The EAC considered the
query and gave inter alia the opinion which is reproduced below:
Query: Creation of assets on alternative land in lieu of the
land given by the government: The company sometimes gets
land free from the state government/forest department. In lieu
of the free land provided for the duration of the project, the
company has to get the afforestation done on alternative land
of the government/forest department. [Point (1)(e) of the query
no. 1.3 of Volume XII of Compendium of Opinions]
Opinion: The expenditure incurred on alternative land, as a
precondition for obtaining the relevant piece of land, should
be considered as a part of cost of acquisition of land.
Accordingly, this expenditure should be capitalised as cost of
land and shown as part of the cost of land in the balance
sheet.
10. On the basis of this opinion, as per the querist, the company
strengthened its stand by indicating that the case is analogous as
referred above except that in our case, the land has been diverted
on lease basis for the specific purpose of passing through of
transmission line over the forest area. Even after diversion of land,
trees are required to be grown on the diverted land upto a specific
height and the same remains the property of the Forest Department.
The land also remains the property of the Forest Department
since no other use is permissible. Thus, the querist is only obtaining
the right to use the designated forest land for the purpose of right
of way for erection of towers and stringing. This afforestation and
payment of NPV is in lieu of the loss of vegetation/damages of
existing trees and resultant environmental/ecological impact due
to construction of transmission line in the forest area. Hence, in
the view of the querist, the expenditure should be booked to the
cost of relevant assets, i.e., transmission tower.
B. Query
11. The querist has sought the opinion of the Expert Advisory
Committee on the following issues:
(i) Whether the company’s policy of capitalising the various
expenditure on account of compensatory afforestation
stated above for obtaining approval for construction of
transmission line in the forest area as cost of
transmission line is correct or not.
(ii) If not, the correct accounting treatment.
C. Points considered by the Committee
12. The Committee notes that the querist has raised the issue in
respect of expenditure relating to compensatory afforestation only.
Therefore, the Committee has examined only that issue and has
not examined any other issue that may be contained in the Facts
of the Case, such as, accounting for lease premium, etc.
13. The Committee notes from the Facts of the Case that the
company in question has obtained the right to use the forest land
from the Government for the purpose of erecting towers and laying
down transmission line on the said land. The Committee further
notes that this right to use of the land has been obtained for a
period of 30 years by way of a lease agreement by paying an
upfront lease premium and an annual lease rental.
14. The Committee is of the view that the right to use of the forest
land is an intangible asset keeping in view the following definitions
of the terms ‘asset’ and ‘intangible asset’ as defined in Accounting
Standard (AS) 26, ‘Intangible Assets’, issued by the Institute of
Chartered Accountants of India:
“An intangible asset is an identifiable non-monetary asset,
without physical substance, held for use in the production
or supply of goods or services, for rental to others, or for
administrative purposes.
An asset is a resource:
(a) controlled by an enterprise as a result of past
events; and
(b) from which future economic benefits are
expected to flow to the enterprise.”
15. The Committee notes from the Facts of the Case that the
right to use of forest land, gives the company, the right to lay
transmission lines which facilitates transmission of power, thus,
carries future economic benefits. It also gives the right to the
company to obtain future economic benefits flowing from the
underlying asset and also restricts the access of others to those
benefits. The enterprise has, thus, control over the asset.
Accordingly, the right to use of forest land meets the definition of
an asset. Further, since this right is an identifiable, non-monetary
asset, without physical substance and is held for use in the
production and supply of transmission of power, it is of the nature
of an intangible asset.
16. The Committee notes from the above that in fact there are
two assets which the company in question has, namely, the
transmission line and the intangible asset of right to use the forest
land. The issue is whether the following payments made by the
company should be capitalised as a part of the cost of the
transmission line or as a part of the cost of the intangible asset of
right to use the forest land:
(i) The cost of compensatory afforestation and its
maintenance paid to the Forest Department.
(ii) The cost of plantation of small size tree species below
transmission line for a period of five years.
(iii) A sum of Rs. 5.88 crore as net present value of benefits
from forest, including, oxygen production, biodiversity,
carbon absorption and flood and drought control.
17. The Committee is of the view that the expenditure referred to
in paragraph 16 above cannot be considered as the expenditure
incurred on the site preparation for transmission line. The
Committee is of the view that the site preparation cost in relation
to transmission line would be of the nature of felling of trees or of
foundation laying down costs of towers, etc. The Committee is
further of the view that the expenditure referred to in paragraph 16
above has been incurred for diverting the use of forest land for
non-forest purposes and, therefore, the costs are related to right
to use the land. Accordingly, these should be capitalised with the
cost of right to use the forest land. The Committee is of the view
that this view is also supported by the opinion on query no. 1.3
contained in Volume XII of the Compendium of Opinions referred
to in paragraph 9 above. The Committee notes that the opinion on
query no. 1.32 contained in Volume IX of the Compendium of
Opinions referred in paragraphs 8 and 9 above, is not relevant in
the present case.
D. Opinion
18. On the basis of the above, the Committee is of the following
opinion on the issues raised in paragraph 11 above:
(i) No, the company’s policy of capitalising the various
expenditure on account of compensatory afforestation
stated in paragraph 16 above for obtaining approval for
construction of transmission line in the forest area as
cost of transmission line is not correct.
(ii) The company should capitalise the above-said
expenditure for obtaining right to use of forest land as a
separate intangible asset.
1Opinion finalised by the Committee on 13.11.2007.
2The Guidance Note has since been withdrawn pursuant to the decision of the
Council at its 280th meeting held on August 7-9, 2008.
|