1.25     Query

Disclosure in the accounts of lessor company regarding

leasing out of land to other companies

1. A Government of India Undertaking registered under the Companies Act, 1956, possesses about 3600 acres of land which was acquired by the State Government, for the company and handed over to the company as free-hold land on payment of compensation by the company. Accordingly, the company has been showing this land in its Annual Accounts as freehold land.

2. Recently, about 37 acres of land has been leased out by the company for a period of 50 years to other organisations which are State Government organisations. The fact of leasing the land to other companies was not disclosed in the accounts. The ownership of the land still vests in the company.

3. During the review of the accounts of the company for the year 1985-86 by the Government Auditors, a view was taken that the fact of leasing out the land by the company to other parties should have been disclosed in the accounts. However, the auditors did not comment on the same on the assurance by the company that this point will be further examined by it.

4. The querist has also informed that sub-clause No. (xii) of clause No. II and clause IV of the lease deed provide as follows:

            “The lease shall be for a period of 50 years. However, the lessee shall have the option, with the consent of the lessor, to have the lease renewed for another fifty years on the terms to be mutually settled, at its own expense, and cost, but no renewal shall be allowed unless an application to that effect is made by the lessee to the lessor at least three months before the expiry of present lease.”

            Clause IV of the aforesaid deed provides as below:

            “On the expiry of the lease or on sooner determination of the term hereby created (other than determination under clause III above) the lessee shall remove its buildings and structure and other fixtures and fittings within a reasonable time not exceeding six months after the expiry of the term or the determination of lease as the case may be, failing which the land shall become the property of the lessor and the lessee shall not be entitled to claim any compensation or damage in respect of the same”.

5. The querist has sought the opinion of the Expert Advisory Committee as to whether it is necessary/obligatory for the lessor company to disclose this fact in the accounts by giving an explanatory note?

                                                                         Opinion                                September 15, 1987

The Committee notes that the law does not require separate disclosure of land given on lease, as per the facts and circumstances of the query, in the balance sheet of lessor. The Committee is accordingly of the opinion that the land given by the company on lease should be included in the “Free-hold Land”. However, the company may disclose the fact of land given on lease by way of a note to the accounts as an additional information.

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