ACCOUNTING TREATMENT FOR EXPENDITURE

[NITIN DESAI]

SIR,

OUR'S IS PRIVATE LIMITED COMPANY. DURING F.Y. 2014-2015, WE HAVE SET UP NEW PROJECT IN DAHEJ SPECIAL ECONOMIC ZONE, DAHEJ. WE HAVE ELECTRICITY PURCHASE ARRANGEMENT FROM M/S TORRENT ENERGY LTD. NOW AT THE TIME OF PROVIDING ELECTRICITY LINE FROM THEIR POINT TO OUR FACTORY, WE HAVE PAID RS. 15 LAC TOWARD SERVICE LINE COST. THE COMMERCIAL PRODUCTION HAS COMMENCED IN MAY,2015. MY QUERY IS WHETHER SUCH EXPENDITURE IS CAPITAL EXPENDITURE OR REVENUE EXPENDITURE OR DEFERRED REVENUE EXPENSES. PLEASE PROVIDE EXPERT OPINION WITH CASE LAW IF AVAILABLE.

[DR.MARIAPPAN GOVINDARAJAN]

In my view it is capital expenditure.

[NITIN DESAI]

Sir,

Thank you for your prompt response. ok, if it is capital expenditure, can we capitalised in our books of accounts as there is no tangible assets created for the same, how to claim the depreciation .

Nitin Desai

[DR.MARIAPPAN GOVINDARAJAN]

Your question is quite correct. I shall analyse the same and will revert.

[Ganeshan Kalyani]

I guess it will fall under Plant and Machinery as per Income Tax and could be taken along with transformer cost. I would expect experts to comment on this for discussion.

[Ganeshan Kalyani]

Hope the query is resolved.

AI Summary

Capital expenditure classification: service line costs for electricity connection may be capitalised and treated as plant and machinery. Expenditure on the electricity service line from the supplier's point to the factory is treated as capital expenditure and may be capitalised in the company's accounts; practitioners recommend classifying the cost under Plant and Machinery (for income tax purposes) and grouping it with transformer cost for depreciation, despite the absence of a distinct tangible asset.