Applicability of Schedule VI and MAOCARO to

a land development company.

1.The main object of a company as stated in its Memorandum of Association is “To purchase, acquire, contract, develop, cultivate and sell agricultural and urban lands”. The company buys large areas of virgin lands, develops and cultivates them and sells them in small plots. The company also arranges purchase of land by group of persons and these persons entrust their newly purchased virgin lands to the company for development. The company’s income, therefore, consists of (i) sale proceeds from developed land and (ii) development charges recovered from persons who have entrusted their lands for development to the company. The company’s assets include land purchased by it and in the process of development.

2. The querist has referred the following issues for the opinion of the Expert Advisory Committee:

A.Queries in respect of Schedule VI to the Companies Act, 1956:

(i) Land being the ‘Stock-in-trade’ of the company, should it not be shown under ‘Current Assets’ instead of under ‘Fixed Assets’?

(ii) Since the company converts virgin lands into productive lands, is it a manufacturing or trading company? If so, whether quantitative details in respect of opening and closing stocks, purchases and sales of land have to be furnished and partly developed land to be shown as work-in-progress?

B.Queries in respect of MAOCARO:

(i) Do the provision in respect of physical verification of stock and stores apply to the land holding of the company?

(ii) Since the company also does the development of lands not owned by it, does it become a service company attracting the relevant provisions?

Opinion September 11, 1989

1.The Committee notes that the activities of the company can be classified into two categories, namely:

(i) Buying large virgin lands and selling them in small plots after developing and cultivating them.

(ii) Development of virgin lands on behalf of others.

2.The Committee notes paragraph 6.1 of Accounting Standard 10 on ‘Accounting for Fixed Assets’, issued by the Institute of Chartered Accountants of India, which, inter alia, states:

“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.”

3.The Committee notes that land is being held by the company for sale in the normal course of business and is not held for the purpose of producing or providing goods or services. The Committee is, therefore, of the opinion that land is an inventory of the company and should be shown under ‘Current Assets’ instead of ‘Fixed Assets’.

4. With regard to the activity specified in para 1(i), the Committee does not wish to express an opinion as to whether the company is a manufacturing company or a trading company as it involves interpretation of law. However, in any case, the Committee is of the view that, for the purposes of Part II of Schedule VI, the company should disclose the quantitative details in respect of opening and closing stocks, purchases and sales of land.

5. With regard to the activity specified in para 1(ii), the Committee is of the view that since the land belonging to others is developed in return for development charges, the company is carrying on a service activity.

6.The Committee is of the following opinion on the basis of the above, with regard to the disclosure requirements of Part II of Schedule VI:

(i) The company has to give quantitative details in respect of opening and closing stocks, purchases and sales of land as required by Part II of Schedule VI to the Companies Act, 1956, in terms of area of the land. In respect of the activity regarding development of land on behalf of others, which is a service activity, the gross income from developing land should be given as per the relevant requirement of Part II of Schedule VI to the Companies Act.

(ii) The inventory of land may be shown under two categories (a) land under development; and (b) fully developed land.

7. With regard to the applicability of the MAOCARO 1988, the Committee is of the following opinion:

(i) The provision in respect of physical verification of stock and stores apply to the land holding of the company. The physical verification may be done in terms of area and title of the land.

(ii) The company is a service company as regard to the development of lands not owned by it, and therefore it would attract the relevant provisions of the Order.

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