1.14     Query

Accounting treatment of deposit made for using office space.

1. An office space measuring 70,000 sq. feet has been acquired by ‘X’ corporation – registered under the Companies Act, 1956 – pursuant to a sub-licence agreement entered between ‘X’ corporation and ‘Y’ Ltd. The relevant details in this regard are as follows:

(a) M/s. ‘Y’ Ltd. holds the Principal Licence granted by the Municipal Committee of the city for construction of a 5 star hotel besides using the balance space for commercial purposes, in accordance with the provisions of licence.

(b) The licence granted by the Municipal Committee to M/s. ‘Y’ Ltd., is for a period of 99 years w.e.f. 11^th March, 1981.

(c) Under clauses 11 and 29 of the Licence Deed, ‘Y’ Ltd. can sub-licence the property.

(d) ‘Y’ Ltd. sub-licenced 70,000 sq. feet of the commercial building to ‘X’ under a sub-licence deed on 22^nd September, 1984, for a total consideration of Rs. 8,99,50,000. This amount shall remain as interest free deposit with ‘Y’ Ltd. during the validity of the sub-licence. The deposit shall be repaid by ‘Y’ Ltd. to ‘X’ forthwith upon termination or determination of the company’s (‘Y’s) licence under Principal Licence for any cause and/or forthwith upon the termination or determination of the sub-licencee’s sub-licence.

(e) The sub-licencee shall be responsible for the payment of licence fee and service charges as per the sub-licence deed.

2. The querist has further informed that as the amount paid to ‘Y’ Ltd. is in the form of a security deposit, which is refundable to ‘X’ after 97 years or earlier on the termination or determination of the Principal Licence or sub-licence, the amount of Rs. 899.50 lakhs has been treated as a deposit and classified under ‘Loans & Advances’ in the accounts for 1986-87. Further, this security deposit is secured by an English Mortgage which has also been registered with the appropriate authority. ‘X’ corporation has also obtained a legal opinion, which advised the corporation to follow the accounting treatment presently being followed by the corporation. Statutory auditors of the corporation have also concurred with the treatment given by the corporation.

3.The C & A.G. has, however, raised the following objection u/s 619 (4) of the Companies Act, 1956, on the accounts of 1986-87 of the corporation and suggested that the amount should be shown under ‘Fixed Assets’ as leasehold building:

“Interest Free Deposit of Rs. 899.50 lakhs paid to M/s, ‘Y’ Ltd/. towards the acquisition of 70,000 sq. feet office space should have been classified under Fixed Assets”

4. The corporation, however, argues that since the money given to ‘Y’ is of the nature of recoverable deposit after 97 years or earlier as stated above, it cannot be shown as a leasehold. ‘X’ corporation will have to charge-off the amount in 97 years, whereas, according to the querist, the amount is actually of the nature of an ‘advance’ as it has to be refunded by ‘Y’ Ltd.

5. In view of the aforesaid facts, the querist has sought the opinion of the Expert Advisory Committee as to whether the amount of Rs. 899.50 lakhs, paid to ‘Y’ as a security deposit under the sub-licence agreement between ‘X’ corporation and M/s. ‘Y’ Ltd., is of the nature of ‘Loans & Advances’ or that of a ‘Fixed Asset’. The querist has furnished copies of the Principal Licence Deed and Sub-licence Deed for the consideration of the Committee.

                                                                   Opinion                                      May 25, 1988

1. The Committee notes that clause II of the sub-licence deed between ‘X’ and ‘Y’ states that “in consideration of the licence fee and service charges hereinafter provided, the company hereby grants………the sub-licence….”. The Committee also notes that clause IV (a) of the said sub-licence deed provides that as and from the date of the readiness for occupation as certified jointly by the representatives of the Company and the Sub-Licencee, the Sub-Licencee shall pay the Company each month in advance by the 10^th day of the month for which it is due, a licence fee of Rs. 1,22,500/- (Rupees One Lakh, Twenty-two Thousand and Five Hundred only) calculated at the rate of Rs. 1.75 (Rupee One and Paise Seventy five only) per sq. ft. of the office accommodation.

2. The Committee notes from the above that the amount of Rs. 899.50 lakhs paid as security deposit by ‘X’ to ‘Y’ is not the ‘total consideration’ of the transaction as mentioned by the querist in para 1(d) above, but is in addition to the monthly licence fee etc.

3.The Committee also notes that clause VIII (c) of the sub-licence deed provides that “the security deposit shall be used by the company to finance the Hotel Complex Project and its repayment…..shall be secured by an English mortgage of the office accommodation pursuant to the provisions of clause 5 of the Principal Deed”. The Committee further notes that said clause 5 permits the licencee to raise loans on the security of the buildings from specified bodies, including, “any Government Public Undertaking of the Government of India” [clause 5 as amended by the Principal Licenser’s letter dated 27.7.84].

4.On the basis of the above, the Committee is of the opinion that the amount of Rs. 899.50 lakhs, paid by ‘X’ to ‘Y’, should appear under the head ‘Loans and Advances’, because it is of the nature of advance recoverable in cash.

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