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.

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.