Query No. 1 [S. 2(47) & S. 54 / S. 54F]

In case of redevelopment of property the consideration takes in the form of corpus, which is a real cash inflow and fair market value of the property to be developed, which is a deemed consideration for the purpose of exchange. Thus, there is exchange of property. Now, the question is in which year capital gain arises and when can exemption be claimed either under Section 54 or under section 54F?


In case of development of property the capital gain arises as per terms of the agreement. Generally, the agreement provides that the developer has right to enter and construct on the land of owner and owner parts with land only on receipt of certain portion of building to be constructed. Till then possession of land is not parted with. In such case, the amount received is to be treated as advance. Section 2(47) defines ‘transfer’ in relation to a capital asset, which includes an “exchange”. The Transfer of Property Act, 1882 provides that when two persons mutually transfer the ownership of one thing for the ownership of another, neither thing or both things being money only, such transaction is called an “exchange”. The transaction of an exchange involves the transfer of property by one person to another and reciprocally the transfer of property by that other to the first person. There must be a mutual transfer of ownership of one thing for the ownership of another.
[CIT v. Rasiklal Maneklal 177 ITR 198 (SC)]. So, the capital gain arises at the time of exchange of property on the basis of fair value of the properties. At that time the person can claim an exemption under Section 54 / Section 54F of the Act, on complying the conditions mentioned in the section.

In case of redevelopment, similar principle would apply, subject to terms and agreement with the developer.

Query No. 2 (Cost for Indexation)

A person acquired inherited property before Independence. Thereafter, he had obtained, the court order for legal heirship in the Financial Year 1991/92, At that time stamp duty was paid amounting to Rs. 1,98,840/-. Can it be considered as cost for indexation?


Section 49(1) provides that where the capital asset acquired by an assessee by way of inheritance, the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it. In this case, the property was acquired by inheritance before Independence. It seems because of some dispute the assessee obtained the Court order for legal heirship in the Financial Year 1991/92. Therefore, this cannot be considered as cost of acquisition and no indexation is available on that value. However, as per section 55(2)(b) the fair value of the property as on April 01,1981 can be taken for indexation.


Query No. 3 (Depreciation)

As per Schedule II of the Companies Act, 2013 the useful life of Plant and Machinery and in generation of power is 40 years, but as per the company, useful life is much less. What the company should do?


Note no. 3(i) of Part ‘A’ of Schedule II of the Act, provides as under:

“The useful life of an asset shall not be longer than the useful life specified in Part ‘C’ and the residual value of an asset shall not be more than five per cent of the original cost of the asset.

Provided that where a company uses a useful life or residual value of the asset which is different from the above limits, justification for the difference shall be disclosed in its financial statement”.

Thus, the querist should obtain technical evaluation report for claiming higher depreciation i.e. claiming useful life less than Schedule II of the Act.

Query No. 4 (Corporate Social Responsibility)

Whether it is necessary to provide (Corporate Social Responsibility) CSR expenses in the books of account on accrual basis, considering AS–29 “Provisions, Contingent Liabilities and Contingent Assets”?


Section 128 of the Companies Act, 2013 mandates every company to maintain its books of account on accrual basis. As per AS-1 “Disclosure of Accounting Policies” in accrual basis cost and revenue are accrued that is recognised as they are incurred or earned and recorded in the financial statements of the periods to which they relate:

As per AS-29, a provision is a liability which can be measured only by using a substantial degree of estimation.

Further, it states that a provision should be recognised when:

a) An enterprise has a present obligation as a result of a past event;

b) It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and

c) A reliable estimate can be made of the amount of the obligation.

If these conditions are not met, no provision shall be recognised.

Now considering the provisions of the Companies Act, 2013 the Institute of Chartered Accountants of India has issued Guidance note on for Expenditure on Corporate Social Responsibility Activities (CSR) on May 15, 2015 which reads as under:

6. Section 135(5) of the Companies Act, 2013, requires that the Board of every eligible company, “shall ensure that the company spends, in every financial year, at least 2% of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy”. A proviso to this Section states that “if the company fails to spend such amount, the Board shall, in its report … specify the reasons for not spending the amount”.

7. Further, Rule 8(1) of the Companies (Corporate Social Responsibility Policy) Rules, 2014, prescribes that the Board Report of a company under these Rules shall include an annual report on CSR, containing particulars specified in the Annexure to the said Rules, which provide a format in this regard.

8. The above provisions of the Act clearly lay down that the expenditure on CSR activities is to be disclosed only in the Board’s Report in accordance with the Rules made thereunder. In view of this, no provision for the amount which is not spent, i.e., any shortfall in the amount that was expected to be spent as per the provisions of the Act on CSR activities and the amount actually spent at the end of a reporting period, may be made in the financial statements. The proviso to Section 135(5) of the Act, makes it clear that if the specified amount is not spent by the company during the year, the Directors’ Report should disclose the reasons for not spending the amount. However, if a company has already undertaken certain CSR activity for which a liability has been incurred by entering into a contractual obligation, then in accordance with the generally accepted principles of accounting, a provision for the amount representing the extent to which the CSR activity was completed during the year, needs to be recognised in the financial statements.

9. Where a company spends more than that required under law, a question arises as to whether the excess amount ‘spent’ can be carried forward to be adjusted against amounts to be spent on CSR activities in future period. Since ‘2% of average net profits of immediately preceding three years’ is the minimum amount which is required to be spent under Section 135(5) of the Act, the excess amount cannot be carried forward for set off against the CSR expenditure required to be spent in future.

Other consideration in Recognition and Measurement

10. A company may decide to undertake its CSR activities approved by the CSR Committee with a view to discharge its CSR obligation as arising under Section 135 of the Act in the following three ways:

(a) Making a contribution to the funds as specified in Schedule VII to the Act; or

(b) Through a registered trust or a registered society or a company established under Section 8 of the Act (or Section 25 of the Companies Act, 1956) by the company, either singly or along with its holding or subsidiary or associate company or along with any other company or holding or subsidiary or associate company of such other company, or otherwise; or

(c) In any other way in accordance with the Companies (Corporate Social Responsibility Policy) Rules, 2014, e.g. on its own.

11. In case a contribution is made to a fund specified in Schedule VII to the Act, the same would be treated as an expense for the year and charged to the statement of profit and loss. In case the amount is spent in the manner as specified in paragraph 10(b) above the same will also be treated as expense for the year by charging off to the statement of profit and loss. The accounting for expenditure incurred by the company otherwise e.g. on its own would be accounted for in accordance with the principles of accounting as explained hereinafter.

CSR activities carried out by the company covered under paragraph 10(c)

12. In cases, where an expenditure of revenue nature is incurred on any of the activities mentioned in Schedule VII to the Act by the company on its own, the same should be charged as an expense to the statement of profit and loss. In case the expenditure incurred by the company is of such nature which may give rise to an ‘asset’, a question may arise as to whether such an ‘asset’ should be recognised by the company in its balance sheet. In this context, it would be relevant to note the definition of the term ‘asset’ as per the Framework for Preparation and Presentation of Financial Statements issued by the Institute of Chartered Accountants of India. As per the Framework, an ‘asset’ is a “resource controlled by an enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise”. Hence, in cases where the control of the ‘asset’ is transferred by the company, e.g., a school building is transferred to a Gram Panchayat for running and maintaining the school, it should not be recognised as ‘asset’ in its books and such expenditure would need to be charged to the statement of profit and loss as and when incurred. In other cases, where the company retains the control of the ‘asset’ then it would need to be examined whether any future economic benefits accrue to the company. Invariably future economic benefits from a ‘CSR asset’ would not flow to the company as any surplus from CSR cannot be included by the company in business profits in view of Rule 6(2) of the Companies (Corporate Social Responsibility Policy) Rules, 2014.

13. In some cases, a company may supply goods manufactured by it or render services as CSR activities. In such cases, the expenditure incurred should be recognized when the control on the goods manufactured by it is transferred or the allowable services are rendered by the employees. The goods manufactured by the company should be valued in accordance with the principles prescribed in Accounting Standard (AS) 2, Valuation of Inventories. The services rendered should be measured at cost. Indirect taxes (like excise duty, service tax, VAT or other applicable taxes) on the goods and services so contributed will also form part of the CSR expenditure.

14. Where a company receives a grant from others for carrying out CSR activities, the CSR expenditure should be measured net of the grant”

Note: Please send your queries relating to Direct, Indirect & International taxation, Accounting & Auditing Standards and Company Law, FEMA etc. to AIFTP, having interest to the Members.

CA. H.N. Motiwalla

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