Query No. 1

Subject:           Treatment of interest paid on compensation for lands acquired.[1]

A.        Facts of the Case  
                                                  
1.         Government of India has given mandate to a company (hereinafter referred to as ‘the company’) for construction of Mass Rapid Transit System (‘MRTS’) project in Delhi and NCR. For construction of MRTS project, being an infrastructure project, the company requires land for construction of stations, depots, viaduct and other structures for operation and maintenance of metro operations. The land for this purpose is being arranged by Land Acquisition Collector (‘LAC’), an authority nominated by the Government under Land Acquisition Act, 1894. The method of land acquisition and the compensation paid for these acquisitions to LAC are given below:

(i) As per the project requirements, land pieces are identified and the proposal of land requirement is sent to Transport Department, Government of National Capital Territory of Delhi (GNCTD), which, in turn forwards it to Land & Building Department and LAC.

(ii) After joint survey of land by LAC and Revenue Authorities, the draft Notification for acquisition of land for MRTS project under section 4 of the Land Acquisition Act, 1894 is prepared by LAC based on the following parameters:

(a) Determination of market value of the land at the date of the publication of the Notification under section 4, sub-section (1), based on either the rates as per registered sale deed of that area or minimum rate notified by the Government for such land under Registration Act i.e., Circle Rates or any other relevant parameter.

(b) In addition to the market value of the land determined, interest at the rate of 12% p.a. for the period commencing on and from the date of publication of Notification to the date of Award or the date of taking possession of the land, whichever is earlier, is provided. This is provided for bringing the value of the land to its market value as on the date of possession of land or award of compensation, as the case may be.


(c) Further, a sum of 30% on such market value is provided as solatium, in consideration of the compulsory nature of the acquisition.

(iii) After approval of the Notification by competent authority, i.e., Lt. Governor of Delhi, the Notification is published in the Gazette and possession of land is taken over by LAC. Further, the amount of compensation of land acquired is disbursed by LAC directly to the land owners out of the advance given by the company to LAC.

(iv) Any interested person who has not accepted the award may, by application to the District Collector, require that the matter be referred for determination by the Court.  In case of the company, the aggrieved parties have also gone to the District Court for enhanced compensation.

2.         The querist has stated that on 14th July, 2011, the Hon’ble District Court of Delhi issued order to LAC for enhanced compensation to some land owners in respect of certain private properties acquired by LAC for the company at two areas for construction of Phase I of MRTS project. The relief given by the Hon’ble Court in favour of land owners is given below:

“In view of the findings qua the issues herein above, the market value of the land of the petitioners in respect of the property bearing … Delhi which was acquired through the notification No. F.7(26)/2000/L&B/LA/13537 dated 15.12.2000 U/s. 4 of the LA Act, is fixed  at Rs. 28,351/- per sq. meter, which the petitioners shall be entitled to claim compensation as per their respective shares holding as mentioned in the Statement under Section 19 of LA Act on which 30% Solatium shall be admissible to the petitioners in terms of Section 23 of Land Acquisition Act. The petitioner shall also be entitled to have compensation in lieu of the 41 big and 9 small trees on the land belonging to the present claimant as per the claim given by LAC at the rate of  Rs. 500/- per small tree and Rs. 1,000/- per big tree. As the acquisition was more or less is compulsory in nature, therefore, the petitioners are entitled to the interest at the rate of 9% for the first year from the date of dispossession and at the rate of 15% on the difference between the enhanced compensation awarded by this Court and the compensation awarded by the LAC for the subsequent period till the payment is made to the petitioners. The petitioners are further entitled to the interest on the Solatium/additional amount in terms of the judgment of Hon’ble Supreme Court of India in Sunder Versus UOI DLT (2001) SC 569.  Reference is answered accordingly.”

3.         In view of the order given by the Hon’ble District Court, the LAC advised the company to deposit a sum of Rs. 17,518.10 lakh during the financial year 2011-12 to pay enhanced land compensation as per the details given below: 

Details of enhanced land compensation

The payments made by the company during the financial year 2011-12 to LAC as per the order of Hon’ble District Court were as under:

(Rs. in  lakh)

    
The company has deposited Rs. 17,518.10 lakh during the financial year 2011-12 with LAC.

4.         The accounting policies, accounting treatment and disclosures given by the company are given below:

            Accounting policies regarding land

Accounting policies of ……(name of the company) regarding land cover two facets of its operation – land utilised for creation of its own assets viz. construction of stations etc. and land utilised for revenue activity of property department for selling to a developer. Both the accounting policies consistently being followed in the company are reproduced below:

            Accounting policies for capitalisation of land

            The accounting policies of the company for capitalisation of land pieces are given below:

“3.1     Amount received directly by the Land and Building Department, Government of National Capital Territory of Delhi (GNCTD), from Government of India (GOI) and GNCTD for buying land for the company as part of interest-free Subordinate Loan for Land sanctioned to the company, is treated as interest-free subordinate loan for land. The disbursement therefrom through the Land Acquisition Collector directly to the land owners for the said purpose is adjusted as land cost and the balance shown as advance with Land and Building Department.

3.2       Amounts received directly by the company from GOI and GNCTD for the above stated purpose are also treated as interest free subordinate loan for land and included in the land cost to the extent of the amount spent for the purpose.

3.3       Payments made/adjusted provisionally towards cost or compensation related to the land including lease-hold land in possession, are treated as cost of the land or lease-hold land.

3.4       Payment made towards land acquired on temporary basis is amortised over the possession period of the land.

3.5       Compensation, replacement etc., relating to the cost of rehabilitation of Project Affected Persons (PAPs) are booked to Capital Work in Progress (CWIP) and on completion is added to the cost of related assets.

3.6       Land is valued on pro-rata basis with reference to the award given by Land Acquisition Collector wherever transfer value of land is not indicated.”

Accounting Treatment

In terms of Accounting Policy 3.3, the company has capitalised Rs.7,038.37 lakh (Rs. 5,508.15 lakh + Rs. 1,530.22 lakh) as cost of land during the financial year 2011-12.

 Accounting policies for revenue recognition in case of property development            

The accounting policies of the company for revenue recognition in case of sale of land pieces are given below:

“10.4   Income from property development/ rental income in respect of land is recognised in accordance with terms and conditions of the contract with licensee / lessee / concessionaire etc.

10.5     Income from lease of land for property development pursuant to lease agreement for 60 years and above is recognised as sale on handing over of land to developer since it transfers substantially risks and rewards incidental to ownership of land.”

 Accounting Treatment

During the financial year 2011-12, the company has charged Rs.10,479.73 lakh as revenue expenses towards enhanced compensation in respect of land parcels sold to a developer in 2008-09 and the sale proceeds were considered as income of that year.

Accounting Disclosure

The company has also disclosed the facts vide Note No. 30, Sr. No. 14, in the Notes on financial statements for the financial year 2011-12, which is reproduced below:

“14.     Hon’ble District Court vide order dated 14.7.2011 has directed ……(name of the company)  to pay enhanced compensation of Rs.17,518.10 lakh to some Land Owners. The company has deposited the aforesaid amount with LAC (North)/Secretary Land & Building with a request to file an appeal against the order of Hon’ble District Court. As per established accounting practices and prudent accounting measures, the company has capitalised a sum of Rs.7,038.37 lakh in respect of land portion owned by the company and balance Rs.10,479.73 lakh has been charged to revenue for the  land piece which has been sold during the year 2008-09 and sale proceeds considered as income of that year.”

5.         On the above accounting treatment, Resident Audit Party of C&AG has issued Half Margin which is reproduced below: 

“As per Query No. 28 in the Compendium of Opinions – Volume XXV, the Expert Advisory Committee of the Institute of Chartered Accountants of India (ICAI),  interest on enhanced compensation of land as decided by the Competent Land Authority is not directly attributable to bringing the assets to its working condition for its intended use. Accordingly, these interest payments should not be capitalised but recognised in the profit and loss account for the year in which these are incurred. However, the company has paid Rs. 175.18 crore as enhanced land compensation; out of this Rs.55.08 crore including interest proportionately amounting to Rs.33.12 crore (55.08 x total interest/total compensation i.e., 55.08 x 104.90/175.18) has been capitalised in the books of account during the year inconsistent with this opinion.

This has resulted into understatement of revenue expenditure relating to land and overstatement of capital expenditure on land to the extent of Rs.33.12 crore.”

6.         Against the Half Margin, the reply given by the company is reproduced below:

“Hon’ble District Court vide letter dated 14th July, 2011 directed ……(name of the company) to pay enhanced compensation to some land owners. Accordingly, company has deposited Rs.175.18 crore with the Secretary, Land and Building Department. As per accounting practice and prudent accounting measures, the company has capitalised a sum of Rs.70.38 crore in respect of land portion owned by the company and balance of Rs.104.80 crore has been charged to revenue for the land piece which has been sold during the year 2008-09 in which sale proceeds were considered as income.

 

The accounting treatment for the above enhanced land compensation is also in line with the opinion of the Expert Advisory Committee of the ICAI dated 10.10.2011[2]. As per paragraph 13 of the said opinion, the Committee mentioned that interest paid for acquisition of land is only a reference point for determination of final sale consideration of land and does not automatically lead to an inference that the amount so computed is of the nature of interest.

… (name of the company) has paid total enhanced compensation in line with the order of the District Court and recognised the payment of interest as part of cost of land in its books of account.

Hence, the accounting treatment towards interest payment given in the books of account is in line with the opinion of the Expert Advisory Committee of the ICAI dated 10.10.2011.

In view of the above, Audit is requested to drop the Half Margin.”

7.         During discussion in the office of Member, Audit Board, the company has given assurance to the Principal Director (Commercial Audit), Member Audit Board-I, Delhi that the whole issue will be referred to the Institute of Chartered Accountants of India for its expert opinion referring to the opinions mentioned in paragraphs 5 and 6 above.

8.         The querist has given the following arguments for the company’s accounting treatment of enhanced land compensation:

(i) The accounting treatment  is based on the principle of ‘Substance over Form’ as per paragraph 17(b) of Accounting Standard (AS) 1, ‘Disclosure of Accounting Policies’, which is reproduced below:

 
“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.”

(ii) Paragraph 35 of the ‘Framework for the Preparation and Presentation of Financial Statements’, issued by the Institute of Chartered Accountants of India, reads as below:

“Substance over Form

35. If information is to represent faithfully the transactions and other events that it purports to represent, it is necessary that they are accounted for and presented in accordance with their substance and economic reality and not merely their legal form. The substance of transactions or other events is not always consistent with that which is apparent from their legal or contrived form. …”

(iii) The issue is also given cognizance in paragraph 11 of the opinion of the Expert Advisory Committee of the ICAI dated 10.10.2011, in which the Expert Advisory Committee mentioned that the transactions and events should be recorded in accordance with their substance and economic reality rather than legal form.

 

(iv) Further, paragraph 13 of the opinion mentioned in (iii) above, inter alia, reads as, “…The Committee is of the view that the payments determined on the basis of SBI PLR cannot be treated as ‘borrowing costs’ as neither the company has borrowed any funds from SPT on which the borrowing costs may be said to have incurred nor it is payment for any delays on the part of the company. In fact, such delay has occurred on the part of the Government for reaching the final decision for transfer of land. The Committee notes that it is based on the order of the Government that assets are being transferred from one entity to another at the amounts specified in the Order. Considering the principle of ‘Substance over Form’, as discussed in paragraph 11 above, the Committee is of the view that in the extant case, the reference by the Government to a rate of interest is only as a reference point for determination of final sale consideration of the land and does not automatically lead to an inference that the amount so computed is of the nature of interest. In substance, the company is paying the total amount as a consideration to obtain the title to land…”

(v) The rationale of opinion mentioned in (iii) above is relevant in the instant case as well. In the case of the company, initially the award has been given by LAC which is enhanced by Hon’ble District Court. In such cases, the rate of interest is only a reference point for determination of final sale consideration of the land and does not automatically lead to an inference that the amount so computed is of the nature of interest. In the case of the company, the total amount payable has been decided by another constitutional judicial authority, i.e., District Court instead of the Government. In the case mentioned in (iii) above as well as in this case, no borrowing cost is involved. Also, opinion given on 10.10.2011 is the latest opinion of the Expert Advisory Committee in this respect and, thus, has the merit of overriding any earlier opinion. Therefore, the company has capitalised the amount of interest paid on enhanced compensation for land in respect of land capitalised in the accounts.

9.         The querist has separately given the following points in support of the accounting treatment adopted by the company:

(i) Ministry of Urban Development (MoUD) vide letter N0.K-14011/4/2009-MRTS dated 26th September, 2011 gave investment approval of the Union Cabinet for MRTS Project. In this letter, vide Item No. 111 at page 2, it is categorically mentioned about the financing of land which is reproduced below :-

            "The land belonging to various Ministries/ Departments as well as   autonomous/statutory bodies/agencies of the Govt. of India (GOI)/GNCTD, which is required for the project, will be taken over by GOI/GNCTD at inter-departmental transfer rates notified by the MoUD, while the Railway land required will be made available on lease rates based on the commercial market prices applicable for that area, as fixed by Land and Development Office of MoUD, in case the railway land so given is commercially exploited /proposed to be exploited by ….(name of the company). This will be applicable for only that part of Railway land commercially exploited /proposed to be exploited by ….(name of the company). In case the Railway Land given to ….(name of the company) is not used/proposed to be used for commercial exploitation, the land rate applicable for the surrounding land based on the existing use will be considered for working out the lease charges. The total cost of the land to be transferred to ….(name of the company) will be funded by the GO1 and GNCTD in equal proportions in the form of interest-free "subordinate debt" to ….(name of the company). The land so taken over/acquired for the project would be made over to the ….(name of the company) on 99 years' lease at a nominal rent of Rs.11 per annum, treating the actual cost of acquisition as "premium" to be recovered as interest-free "subordinate debt" during the years 21 -25 (i.e., after the senior debt has been fully repaid by ….(name of the company))." (Emphasis supplied by the querist.)

(ii) As per the above mandate, land required for the project will be acquired by various Government agencies as mentioned above and handed over to the company and total cost of the land so taken over/acquired for the project will be funded by the GOI and GNCTD in equal proportions.

 

(iii) Further, it is submitted that initially, to start the project within stipulated target time, LAC acquires land and hands over the same to the company as per the procedure explained in paragraph 1 above. All the elements mentioned in that paragraph are considered initially to compute suitable compensation to the land owners at least at initial stage. However, the aggrieved land owners always have a right to approach the Hon'ble District Court for enhanced compensation. The basic idea of all such elements is to bring the value of land equivalent to its market value as on the date of possession of the land which also includes compensation for late settlement of the enhanced compensation.

(iv) For the company, compensation paid at initial stage together with any additional payment made subsequently is treated as cost of land in the books. Moreover, Hon'ble District Court issued orders on Union of India through LAC and LAC, in turn, raised demand from the company for payment of enhanced compensation. The company, in turn, raised demand from the respective Government for financial assistance in line with the mandate that the total cost of land transferred to the company will be funded by the Government of India and GNCTD in equal proportion. Hence, the total compensation paid including interest is treated as total cost of land.

 

10.       The querist has separately clarified the following:

(i) Phase I of the MRTS project was completed on 11th November, 2006.

(ii) Land was acquired by LAC for the MRTS project. LAC has been raising demand from the company as and when the land is acquired. On the basis of payment to LAC and after getting details of land, the company is capitalising the amount in the books as ‘Land’. There is no system of providing liability towards probability of enhancement in land compensation and interest thereon in the books.

B.        Query

11.       The querist has sought the opinion of the Expert Advisory Committee on the following issues:

(i) Whether the company’s accounting treatment to capitalise interest as mentioned in Sl. No. (4) and (5) of the table given in paragraph 3 above towards enhanced compensation in respect of land pieces owned by the company as per the order of Court is correct in terms of provisions of Accounting Standard (AS) 10, ‘Accounting for Fixed Assets’ and as per the Expert Advisory Committee’s opinion issued on 10.10.2011.

(ii) If not, what is the alternative treatment of interest paid on enhanced land compensation.

C. Points considered by the Committee

12.       The Committee notes that the basic issue raised by the querist relates to accounting treatment of interest on enhanced land compensation. The Committee has, therefore, considered only this issue and has not examined any other issue that may be contained in the Facts of the Case, such as, accounting treatment of enhanced compensation and additional payments as mentioned in Sl. No. (1), (2) and (3) of the table given in paragraph 3 above, accounting policies for capitalisation of land and revenue recognition in case of property development or lease of land, accounting for cost of rehabilitation, propriety of valuing land on pro-rata basis, propriety of not providing for any liability for the probability of enhancement in land compensation and interest thereon, etc. The Committee has further not examined the issue from the angle of ‘borrowing costs’ as per AS 16 as the querist himself has contended in paragraph 8 (v) above that no borrowing cost is involved in the extant case. The Committee’s opinion expressed hereinafter is purely from accounting point of view and not from the angle of interpretation of various legal enactments, such as, the Land Acquisition Act, 1894 (hereinafter referred to as ‘the Act’).  The Committee also wishes to point out that though the expression ‘enhanced compensation’ normally means original compensation plus increase in compensation, for the sake of convenience, the Committee uses the expression ‘enhanced compensation’ as the difference between final compensation awarded by the Court (excluding 9% interest/15% interest) and the original compensation awarded by the Land Acquisition Collector.

13.       At the outset, the Committee notes the querist’s arguments with regard to earlier opinions of EAC, referred to in paragraphs 5 and 6 above. The Committee is of the view that the two opinions mentioned by the querist in paragraphs 5 and 6 above deal with two different situations which is explained as below:

(i)         In the case mentioned in paragraph 5 above, initially the award for acquisition of land was given by the LAC which was enhanced by the Court. Further, the Court also directed to pay interest @ 9%/15% on enhanced compensation for the period from the date of award/dispossession till the date of payment, though determined at a later date. Thus, the facts of the case mentioned in paragraph 5 above were similar to the facts given in the present case.

(ii)        In the case mentioned in paragraph 6 above, although the company in question had been handed over the possession of land by the transferor entity who had originally incurred certain costs for acquisition of land but at that time it was not clear that which party will own that land, viz., the transferor entity or the company to whom the possession of the land was handed over (viz., the company in question). After few years, the Government decided that the land would be owned by the company in question and also determined the sale consideration by adding an amount equivalent to the interest at the rate of SBI PLR to the cost incurred by the transferor entity. Thus, the Committee had opined that SBI PLR was used as a benchmark to arrive at consideration for the transfer of land. 

Since the facts are different in the two cases as discussed above, the opinion expressed on the case mentioned in paragraph 5 above differs from the opinion on the case mentioned in paragraph 6 above. As such, the Committee does not agree with the querist’s view in paragraph 8(v) above that the opinion expressed on the case mentioned in paragraph 6 above overrides the opinion expressed on the case mentioned in paragraph 5 above. However, though the facts of the case referred to in paragraph 5 above are similar to facts of the extant case, the Committee notes that the earlier opinion referred in paragraph 5 above had apparently focused on the delay in the payment of compensation by the company rather than on delay in the process of arriving at the final decision.

14.       The Committee notes that section 18 of the ‘Act’ provides for reference to the Court by the Collector, at the instance of any interested person who has not accepted the award, for the determination by the Court of certain matters, which include the amount of the compensation. Sections 23 and 24 of the ‘Act’ specify the matters to be considered and maters to be neglected respectively by the Court in determining the amount of compensation to be awarded. As per section 25 of the ‘Act’, the amount of compensation awarded by the Court shall not be less than the amount awarded by the Collector under section 11. Section 28 of the ‘Act’ reads as below:

“28. Collector may be directed to pay interest on excess compensation: If the sum which, in the opinion of the Court, the Collector ought to have awarded as compensation is in excess of the sum which the Collector did award as compensation, the award of the Court may direct that the Collector shall pay interest on such excess at the rate of nine per centum per annum from the date on which he took possession of the land to the date of payment of such excess into Court:

Provided that the award of the Court may also direct that where such excess or any part thereof is paid into Court after the date of expiry of a period of one year from the date on which possession is taken, interest at the rate of fifteen per centum per annum shall be payable from the date of expiry of the said period of one year on the amount of such excess or part thereof which has not been paid into Court before the date of such expiry.”

15.       From the above, the Committee notes that since the award notified by the Land Acquisition Collector (LAC) may be enhanced by the Court in case reference is made to the Court, the compensation towards the acquisition of the land becomes final only on the date of the final award by the Court. The Committee further notes that the Land Acquisition Act itself recognises that the amount awarded by the LAC may not be final or acceptable to the land owners and accordingly, considering the long process of determination of final value of land, it envisages for the payment of various elements apart from the enhanced compensation such as interest @ 9% and 15% from the date of possession till the payment into the Court. The Committee also notes that till the final award of the Court, the quantum of interest to be paid cannot be determined as even the principal amount on which such interest payments are to be made is not determined and therefore, such interest is the result of the process of acquisition of land as per the Act. Accordingly, the Committee is of the view that ‘interest’ in the extant case is a part of the process for determination of purchase price of land and, in substance, should be considered as a component of purchase/ acquisition price only, to the extent the interest payments relate to the period of final determination of the price by the Court. Any interest beyond such period, viz., after the date of final award till the date of payment should not be capitalised and charged to the statement of profit and loss, since, interest after the date of Court’s award is to compensate for delay in the payment of the enhanced compensation as finally awarded by the Court.

D.        Opinion

16.       On the basis of the above, the Committee is of the following opinion on the issues raised by the querist in paragraph 11 above: 

(i) The interest payments referred to at Sl. No. 4 and 5 of the table in paragraph 3 above should be included as cost of the land to the extent they relate to the period upto the date of the Court’s award. Any interest beyond that period should be treated as revenue expenditure and charged to the statement of profit and loss for the year of incurrence.

(ii) See (i) above.

 

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