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A. Facts of the Case
1. A private limited company manufactures nickel sheets using
the electroforming process. The key plant and machinery for the
manufacturing process is an electroplating tank consisting of:
(i) Pure nickel in pellet form, and
(ii) Nickel Sulphamate Solution.
2. The principle of operation is that of electroplating. In
electroplating, there are two electrodes dipped in an electrolyte
solution (Nickel Sulphamate solution). They are given opposite
electric charges; the electrode having positive charge is called
Anode and the one having negative charge is called Cathode.
When the electric charge is applied, Anode dissolves in the
electrolyte and the metal that has dissolved gets deposited on the
Cathode. The Anode consists of a perforated titanium basket filled
with the nickel pellets. The nickel in the basket dissolves in the
nickel sulphamate solution. The Cathode consists of a metal sheet.
The nickel that dissolves from the Anode gets deposited on the
Cathode, thus the product is ready. In the normal course of
operation, whatever nickel is taken away from the Anode is
replenished by way of addition of fresh nickel pellets.
3. To get the production started and then to maintain the desired
quality of product, it is absolutely essential that the quantity of
nickel in the Anodes as well as the quantity and concentration of
nickel sulphamate solution be maintained as per the standards.
Unless nickel and nickel sulphamate solution is added to the tank
the same cannot be put to use.
4. In short, according to the querist, the quantity of initial nickel
and nickel sulphamate solution that is put inside a tank stays for
the entire operational life of the tank. Hence, the cost of initial
nickel and nickel sulphamate solution is treated as capital cost for the purpose of obtaining term loan for buying six new tanks in the
financial year 2007-08. Besides the six new tanks added in the
financial year 2007-08, the company has twelve old tanks where
the cost of initial nickel and nickel sulphamate solution has not
been considered as capital cost and the balance stock in the tanks
as on the balance sheet date is shown as work-in-progress. As
per the querist, this being major addition, management of the
company felt it necessary to ascertain as to whether capitalisation
of cost of initial nickel and nickel sulphamate solution is proper.
B. Query
5. The querist has sought the opinion of the Expert Advisory
Committee on the following issues:
(i) Whether the accounting treatment given by the company
to treat the cost of nickel and nickel sulphamate solution
in the six new tanks, acquired in the financial year 2007-
08, as capital expenditure is correct.
(ii) In case the answer to the above question is in the
affirmative, then whether it is necessary to declare the
same as a change in the accounting policy for fixed
assets, since nickel and nickel sulphamate solution in
earlier tanks has not been capitalised.
(iii) In case the answer to (i) above is in the affirmative
whether it is possible to transfer the work-in-progress
(WIP) to capital asset in respect of earlier 12 tanks in
the financial year 2007-08. This, according to the querist,
will be done by transferring WIP to fixed assets. If it is
possible, the following questions arise:
(a) At which price transfer from WIP to Fixed assets
should be made, whether at today’s price (carrying
cost) or the price at which it was originally purchased,
i.e., 1998 price.
(b) Whether depreciation from the date of capitalisation
(1998) to date should be considered.
(c) If WIP is transferred at 1998 price, what treatment
should be given for the balancing amount (difference
between the present WIP value and 1998 price).
(iv) Whether the company can adopt dual accounting policy,
i.e., continue to show the nickel and nickel sulphamate
solution in the earlier 12 tanks as WIP and capitalise
the nickel and nickel sulphamate solution in the new 6
tanks during the financial year 2007-08.
(v) In case the nickel and nickel sulphamate solution, in
respect of 12 old tanks, is to be capitalised, whether the
Income-tax Department will permit depreciation thereon.
C. Points considered by the Committee
6. The Committee notes the definition of the term ‘fixed asset’
as given in paragraph 6.1 of Accounting Standard (AS) 10,
‘Accounting for Fixed Assets’, as reproduced below. The Committee
also notes the definition of the term ‘inventories’ and paragraph 4
of Accounting Standard (AS) 2, ‘Valuation of Inventories’, which
state as follows:
AS 10
“6.1 Fixed asset
is an asset held with the intention of
being used for the purpose of producing or providing
goods or services and is not held for sale in the normal
course of business.”
AS 2
“Inventories are assets:
(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale; or
(c) in the form of materials and supplies to be
consumed in the production process or in the
rendering of services.”
“4. …Inventories also encompass finished goods
produced, or work in progress being produced, by the
enterprise…”
7. The Committee further notes the definition of ‘Work in Process’
as contained in the Guidance Note on Terms Used in Financial
Statements, issued by the Institute of Chartered Accountants of
India, which provides as follows:
“Work in Process includes all materials which have undergone
manufacturing or processing operations, but upon which further
operations are necessary before the product is ready for sale.”
8. The Committee notes from the Facts of the Case that the
initial nickel and nickel sulphamate solution put into the tank get
consumed in the production process through electroplating and
are not held as such for producing the goods, as in the case of
fixed assets. The quantity of nickel and nickel sulphamate solution
in the tank have to be replenished by way of fresh additions in
order to continue the production process and thus, it is only the
quantity of initial nickel and nickel sulphamate solution that stays
in the tank for its entire life and not the one originally put into the
tank. Accordingly, the contention of the querist in paragraph 4
above to capitalise the cost of initial nickel and nickel sulphamate
solution on this ground is not valid. Thus, the Committee is of the
view that the initial nickel and nickel sulphamate solution that are
contained in the tank are of the nature of work-in-progress to be
disclosed as inventory.
D. Opinion
9. On the basis of the above, the Committee is of the following
opinion on the issues raised in paragraph 5 above:
(i) No, the accounting treatment given by the company to
treat the cost of initial nickel and nickel sulphamate
solution in the six new tanks, acquired in the financial
year 2007-08, as capital expenditure is not correct.
(ii) Since the answer to the above question is not in the
affirmative, the answer to this question does not arise.
(iii) Since the answer to (i) above is not in the affirmative,
the answer to this question does not arise.
(iv) No, the company cannot adopt dual accounting policy
for similar items purchased at different points of time.
(v) Answer to this question does not arise as the cost of
nickel and nickel sulphamate solution is not to be
capitalised. In any case, as per Rule 2 of the Advisory
Service Rules, in accordance with which the Committee
replies to the queries received, the Committee does not
answer the issues involving legal interpretation of various
enactments, such as, the Income-tax Act, 1961.
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