FBT--Contract Costs

Dear Rajput Sahib,

Where is the question of capitalization in it? Manisha's client is aBuilder who is executing some contract. The expenses he incurs arehis Contract Costs, which he cannot write off till the contract iscomplete and the revenue is recognized. Till that time, thoseexpenses will appear in the Balance Sheet as an asset. Read para 42of AS-7.Actually, Manisha fogged the issue by using theword "capitalization". Anything that appears on the asset side ofthe Balance Sheet is not a Capital Asset! The Contract Costsappearing in the Balance Sheet till the recognition of revenue (whenthose will be transferred to Contract P & L A/c) are akin to prepaidExpenses in this case. They aren't Capital assets on which you willeventually claim depreciation. The Building or whatever project thecontractor is executing will become a Capital Asset in the hands ofthe contractee on whose behalf the contactor is carrying out theconstruction. To the builder, the contract costs are "purchases" andthe contract revenue will be "sales".The expenditure forming contract costs has been incurred; theBuilder can't write it off yet because of the accountingtechnicalities. But he has to pay FBT on it in the year he incursit. Please note that this is also not an advance payment ofexpenditure as discussed in Q 18 of the Circular. In this instance,the assessee has "incurred any expense or made any payment" in thesense it is meant in Section 115WB(2).But I agree Q 16 wasn't germane to Manisha's query either. Since sheused the word "pre-operative", I ended up quoting CBDT's answer tothat question. The builder's operations have very much begun, and sothe expenditure is post-operative. Use of inappropriate nomenclaturecreated all the confusion.Thanks,CA Sanjeev Bedi--- In

ICAI_CIRC_MEERUT_CA@yahoogroups.com, ajay rajput wrote:>> Dear Sir,>> i would lyk to add that as per Qus no.89 of the said circular>> Whether capital expenditure falling within the categoriesspecified in section 115WB(2) would be covered in the scope offringe benefits?> 89. Expenditure on any capital asset in respect of whichdepreciation is allowable under section 32 of the Income-tax Actdoes not fall within the scope of sub-section (2) of section 115WBof the Income-tax Act since the proximate objective of incurringsuch expenditure is the acquisition of a capital asset. Therefore,such expenditure is not included in reckoning the value of fringebenefits [except depreciation on motor cars or aircrafts referred toin clauses (H) and (I) of sub-section (2) of section 115WB] and isnot liable to FBT.>>> Hence if the enterprises is capitalising the expenses then itcan not be said that it is providing Fringe Benifit to that extentbut the capitalisation should be one which may be accepted by thetax authorities..>> the question you hav referred is General in nature and itcontradicts with ques no. 89 hence the more specific Ques shallprevail over the general one...>> This view has also been get confimed by Mr Vinod Kr Singhaniain a workshop on Perks...valuation and FBT..>> Please correct me ..!!!>> Sanjeev Bedi wrote:> Hi Manisha,>> Only those expenses that form part of the actual cost of a capital> asset eligible for depreciation u/s 32 are not subjected to FBT.But> the expenditure falling within clauses (A) to (P) of Section 115WB> (2), incurred by a builder, which is not being charged to the P &L> A/c in keeping with the requirements of the Accounting Standard,> will not be exempt from FBT.>> Consider answer to Q 16 in the FBT circular of the CBDT:>> [Whether pre-operative expenses falling within the categories> specified in section 115WB(2) would be covered in the scope of> fringe benefits?>> 16. Any expenditure incurred for the purposes referred to inclauses> (A) to (P) of sub-section (2) of section 115WB is liable to FBT> irrespective of whether such expenditure is incurred prior to> commencement of the business or thereafter.]>> The flats will be the builder's stock-in-trade, and not capital> assets. So the FBT will be very much required to be paid on these> expenses in the year in which they are incurred, no matter whenthey> are charged to the P & L A/c.>> Thanks,>> CA Sanjeev Bedi>> --- In ICAI_CIRC_MEERUT_CA@yahoogroups.com, CAmanisha chopra> wrote:> >> > Dear Members,> >> > This is a case of a Builder who is preparing his accounts on> construction Completed method thus capitalising all theexpenditure> during thconstruction period as pre operative.> > The account of preoperatives shall be proportionally devided to> all the flats.> >> > My query is that in case of capitalising these expenditure ,> does it make any sence of exemptimng from FBT.> >> > I am slightly confused that's why this query.> >> >> >> >> > CA MANISHA CHOPRA> > NEW DELHI> >>>With Regards>> CA AJAY RAJPUT>> 9891 91 6425>> ca.ajayrajput@...>