Author: inavatiq

Case Details: Jupiter Ventures vs. Assistant Commissioner of Central Tax [2026] 185 taxmann.com 213 (Karnataka)

Judiciary and Counsel Details

• S Sunil Dutt Yadav, J.
• Shreehari & Kiran Naidu, Advs. for the Petitioner.
• K. Hema Kumar, AGA & Akash B. Shetty, Adv. for the Respondent.

Facts of the Case

The petitioner challenged the blocking of the Electronic Credit Ledger (ECL) under Rule 86A of the CGST Rules. It was contended that despite the lapse of more than one year from the date of such blocking, the restriction continued to remain in force. It was submitted that as per Rule 86A(3), such restriction automatically ceases after the expiry of one year from the date of imposition, and therefore, the continued blocking beyond the prescribed period was without authority of law. It was accordingly contended that the ECL ought to have been unblocked upon completion of one year from the date of imposition of the restriction. The matter was accordingly placed before the High Court.

High Court Held

The High Court held that in terms of Rule 86A(3) of the CGST Rules, any restriction imposed on utilisation of input tax credit (ITC) by blocking the ECL under Rule 86A(1) of the CGST Rules shall cease to have effect after the expiry of one year from the date of such imposition. It observed that the statutory framework governing ITC under Section 49 of the CGST Act read with Rule 86A of the CGST Rules does not permit continuation of such blocking beyond the prescribed period, and any such continuance would be contrary to the express mandate of Rule 86A(3). The Court further held that upon expiry of one year, the restriction automatically ceases to have effect. It was concluded that the continued blocking of the ECL beyond one year was illegal and unsustainable. Accordingly, the jurisdictional officer under CGST was directed to unblock the ECL forthwith.

The post ECL Blocking Beyond One Year Illegal Under Rule 86A | HC appeared first on Taxmann Blog.

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1. Query

Alpha Limited (hereinafter referred to as “the company”), is engaged in providing engineering consultancy services and undertaking small construction projects. The company transitioned to Indian Accounting Standards (Ind AS) in 2017 and, since then, has been recognising expected credit loss (ECL) on its trade receivables in accordance with Ind AS 109, Financial Instruments.

For the purpose of estimating ECL, the company has been following a provision matrix (grid-based approach), wherein trade receivables are classified into ageing buckets and provisioning rates are applied based on historical loss experience. This approach primarily relies on past trends and management estimates without incorporating advanced statistical techniques or forward-looking macroeconomic factors.

The company now proposes to replace this approach with a more sophisticated actuarial valuation model, to be performed by an independent expert. The proposed model incorporates probability-weighted outcomes, time value of money, forward-looking information such as inflation and economic growth indicators, and statistical tools including regression analysis and roll-rate methodologies. The company believes that this approach would result in more reliable and relevant measurement of credit losses.

The company is of the view that this transition represents a fundamental change in the measurement basis of ECL, as it involves a shift from a relatively simple estimation approach to a scientifically robust valuation framework. Accordingly, it proposes to treat this change as a change in accounting policy under Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors.

In this background, the issue for consideration is whether the change from a provision matrix approach to an actuarial valuation model for measuring ECL constitutes a change in accounting policy requiring retrospective applicationor a change in accounting estimate to be applied prospectively?

2. Relevant Provisions

Ind AS 8 – Accounting Policies, Changes in Accounting Estimates and Errors

Para 32 of Ind AS 8

An accounting policy may require items in financial statements to be measured in a way that involves measurement uncertainty—that is, the accounting policy may require such items to be measured at monetary amounts that cannot be observed directly and must instead be estimated. In such a case, an entity develops an accounting estimate to achieve the objective set out by the accounting policy. Developing accounting estimates involves the use of judgements or assumptions based on the latest available, reliable information. Examples of accounting estimates include:

(a) a loss allowance for expected credit losses, applying Ind AS 109, Financial Instruments……

Para 34A of Ind AS 8

The effects on an accounting estimate of a change in an input or a change in a measurement technique are changes in accounting estimates unless they result from the correction of prior period errors.

Para 36 of Ind AS 8

The effect of change in an accounting estimate, other than a change to which paragraph 37 applies, shall be recognised prospectively by including it in profit or loss in:

(a) the period of the change, if the change affects that period only; or

(b) the period of the change and future periods, if the change affects both.

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The post Change in ECL Methodology | Policy or Estimate under Ind AS appeared first on Taxmann Blog.

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World Corporate Law News provides a weekly snapshot of corporate law developments from around the globe. Here’s a glimpse of the key corporate law update this week.

1. Securities Law

1.1 ASIC Updates Relief for Securitisation Entities from Holding an AFS Licence

On April 10, 2026, the Australian Securities and Investments Commission (ASIC) remade a legislative instrument exempting securitisation entity from the requirement to hold an Australian financial services (AFS) licence.

ASIC Corporations (Securitisation Special Purpose Vehicles) Instrument 2026/175 (ASIC Instrument 2026/175) continues the relief provided under ASIC Corporations (Securitisation Special Purpose Vehicles) Instrument 2016/272 (ASIC Instrument 2016/272).

ASIC noted that the instrument is operating effectively and continues to form a useful part of the legislative framework.

Accordingly, the ASIC will also make minor amendments to Regulatory Guide 167 AFS licensing: Discretionary powers (RG 167) for consistency and clarity.

Background

ASIC consulted on a proposal to remake the relief in ASIC Instrument 2016/272. Refer to CS 43 Proposed extension of instrument relieving securitisation entities from holding an AFS licence.

ASIC Instrument 2026/175 applies to entities that carry on a securitisation business in specific circumstances and exempts them from the requirement to hold an AFS licence when providing financial services to clients other than retail clients.

Source – News

1.2 CSA Publishes Proposed Amendment to Insider Reporting Requirements for Comment

On April 9, 2026, the Canadian Securities Administrators (CSA) published a notice and request for comment on a proposed amendment to Part 9 of National Instrument 55-104 Insider Reporting Requirements and Exemptions. Part 9 primarily sets out general exemptions from insider reporting requirements in specified circumstances.

The proposed amendment is intended to clarify the insider reporting regime applicable to transactions involving investment funds, and certain structured products, such as structured notes, American Depositary Receipts and Canadian Depositary Receipts, that are based on securities of the reporting insider’s reporting issuer.

The CSA has invited feedback on the proposed amendment. The 60-day comment period closes on June 8, 2026. Stakeholders are encouraged to submit comments using the method set out in the notice, which is available on CSA members’ websites.

The CSA, the council of securities regulators of Canada’s provinces and territories, coordinates and harmonizes regulation for the Canadian capital markets.

Source – Press Release

Click Here To Read The Full Article

The post [World Corporate Law News] ASIC Renews AFS Licence Relief for Securitisation SPVs appeared first on Taxmann Blog.

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CA Naresh Kumar Kabra & Yamish Jain – [2026] 185 taxmann.com 459 (Article)

1. Introduction

A widely held assumption in Indian corporate practice is that a Section 8 company, by virtue of its not-for-profit character, sits outside the consolidated perimeter of its holding entity. That assumption has come under direct challenge.

In the Opinion finalised on 24th April 2024 (Query No. 9), the Expert Advisory Committee (EAC) of the ICAI concluded that a company is required to consolidate the financial statements of its wholly owned Section 8 CSR entity under Ind AS 110, Consolidated Financial Statements. The consequence that follows is equally significant – if a Section 8 company is a subsidiary, it is also a related party, and every fund transfer to it becomes a transaction requiring disclosure under Ind AS 24.

This article examines both questions, advances the view that the principle underlying paragraph 11(b) of AS 21 represents the sounder accounting position, and argues that the EAC Opinion, being recommendatory and not binding, should not be adopted where it conflicts with the economic substance of the Section 8 framework.

2. Part I – Consolidation of Financial Statements

The Statutory Character of a Section 8 Company

A company incorporated under Section 8 of the Companies Act, 2013, operates under three absolute and irrevocable prohibitions that are embedded in both the statute and its Memorandum of Association:

(a) No portion of its profits, income, or property may be paid or transferred to its members, directly or indirectly, in any form whatsoever.

(b) No remuneration or economic benefit may be conferred on any member except out-of-pocket expenses, reasonable interest on money lent, or reasonable rent on premises let to the company.

(c) Upon liquidation, residual assets must vest in another not-for-profit entity with similar objects and cannot revert to the holding company.

These are not contractual restrictions. They are permanent statutory mandates incapable of amendment without the prior approval of the Central Government. The holding company that incorporates a Section 8 entity has, by operation of law, permanently relinquished any claim over the resources it contributes. The economic relationship is that of a statutory donor and a permanent donee.

3. The EAC Opinion—Conclusion and Status

The EAC, examining a fact pattern involving a listed company and its wholly owned Section 8 CSR entity, concluded that all three elements of the control test under paragraph 7 of Ind AS 110, power, exposure to variable returns, and the ability to use power to affect returns are satisfied. The EAC accordingly held that consolidation is required.

Two points must be noted at the outset. First, and critically, EAC Opinions are recommendatory in nature and do not carry the force of law. They are not Accounting Standards notified under the Companies Act, 2013 and carry no mandatory force. A company is entitled to depart from an EAC Opinion where a cogent alternate reading of the applicable standard is available. Second, the EAC’s analysis is directed at the Ind AS 110 framework. AS 21, which contains an express exclusion provision directly on point was not the focus of the EAC’s examination.

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The post Do Section 8 Subsidiaries Require Consolidation | AS vs Ind AS Analysis appeared first on Taxmann Blog.

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Case Details: ARL Infratech Ltd. vs. Deputy Commissioner of Income-tax [2026] 185 taxmann.com 240 (Rajasthan)

Judiciary and Counsel Details

• Sanjeev Prakash Sharma, ACTG. CJ. & Mrs Sangeeta Sharma, J.
• Siddharth Ranka for the Petitioner.
• Siddharth Bapna & Ms Tanushka Saxena for the Respondent.

Facts of the Case

The assessee, engaged in the manufacture of building materials, was a regular taxpayer and had reported aggregate tax payments of about Rs. 45.44 crores for the assessment years 2021–22 to 2026–27. It had availed credit facilities from HDFC Bank, and its industrial plot, along with plant and machinery, stood mortgaged. A search under sections 132/133A was conducted, and an assessment order was passed, based on which the Jurisdictional Assessing Officer (AO) issued notices under section 148 for three assessment years.

Based on the said assessment order, the AO passed a provisional attachment order under section 281B attaching the assessee’s mortgaged industrial plot. Assessee contended that the attachment was contrary to CBDT Office Memorandums prescribing a benchmark of 15–20 per cent deposit and violated principles of natural justice. The matter reached the Rajasthan High Court.

High Court Held

The High Court held that the assessee was a regular taxpayer and had paid taxes regularly. Merely based on an apprehension that a demand may be created for a sum of Rs. 1.30 crore, a provisional attachment order was passed. Even in the search, a petty amount of Rs. 4.40 lakh was attached for the assessment year 2023-24, and no demand was created for the assessment years 2022-23 and 2024-25. Such attachment, even if provisional, creates apprehension and fear among bankers who are lending to the concerned units for their businesses. Their public reputation is seriously hampered.

Therefore, invoking such a provision has to be done by exercising great caution and care so as not to harm the reputation of an honest income taxpayer. While section 281B gives unequivocal power to the authority to put the properties under attachment, the Apex Court has time and again held that such power has to be exercised by taking into consideration all the aspects and the contentions prescribed in the statute must be strictly fulfilled. Once such a provision has to be treated as draconian in nature, in the opinion of this Court, the minimum requirement is to allow the concerned assessee to make the payment or part of it as required in the Office Memorandum issued by the CBDT.

It cannot be presumed that the assessee would not make the payment. Principles of natural justice would, to that extent, be inherent, as civil rights are likely to be harmed if action is taken under section 281B. Therefore, the order of attachment was set aside with a direction to the assessee to deposit 20 per cent of the provisionally assessed demand within one week.

List of Cases Referred to

• Radha Krishan Industries v. State of Himachal Pradesh & Ors. [2021] 127 taxmann.com 26 (SC) (para 9)
• Saravana Selvarathnam Retail (P.) Ltd. v. Pr. CIT [2025] 174 taxmann.com 62/482 ITR 121 (Madras) (para 10)
• Abul Kalam v. Asstt. CIT [2020] 117 taxmann.com 717/[2021] 431 ITR 395/[2020] 272 Taxman 467 (Calcutta) (para 10)
• Xiaomi Technology India (P.) Ltd. v. Dy. CIT [2022] 145 taxmann.com 501/[2023] 451 ITR 58/291 Taxman 315 (Karnataka) (para 10)
• Indian Minerals and Granite Co. v. Dy. CIT [2022] 137 taxmann.com 119/440 ITR 292 (Karnataka) (para 10)
• Vodafone Idea Ltd. v. Dy. CIT [2020] 119 taxmann.com 337/274 Taxman 233 (Bombay) (para 10)
• Raghunandan Enterprise v. Asstt. CIT [2022] 139 taxmann.com 51/442 ITR 460 (Gujarat) (para 10).

The post Section 281B Attachment Without Demand and Hearing Unjustified | HC appeared first on Taxmann Blog.

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Case Details: Municipal Corporation of Greater Mumbai vs. Mumbai Mahanagarpalika Karyalayeen Karmachari Sanghtana [2026] 184 taxmann.com 639 (Bombay)

Judiciary and Counsel Details

• Amit Borkar, J.
• Ram S. Apte, Sr. Adv. & D.R. Kawale for the Petitioner.
• Prakash Devdas & Ms Vidula Patil for the Respondent.

Facts of the Case

In the instant case, employees of the petitioner Municipal Corporation were placed on promotional posts on an ad hoc basis due to the non-availability of suitable candidates from reserved categories.

Subsequently, upon availability of vacancies, the employees were regularised. The employees thereafter filed a complaint before the Industrial Court seeking continuity of service and consequential seniority from the date of their initial ad hoc promotion, along with recognition of such service as qualifying service for the purposes of Time Bound Promotion/Assured Career Progression.

The Industrial Court held that the Corporation had engaged in an unfair labour practice under Item 9 of Schedule IV by denying continuity of service despite allowing the employees to work on promotional posts for several years with attendant benefits. It further noted that the retrospective imposition of a one-day technical break for the period 2004–2006 was unjustified. Accordingly, the Industrial Court directed the Corporation to grant continuity of service with consequential seniority and to recognise such service for limited purposes.

High Court Held

The High Court observed that since the employees had in fact discharged duties on promotional posts for a considerable period and had been granted benefits attached to such posts, the period of service from the date of initial ad hoc promotion could not be disregarded. It held that such service deserved recognition, at least for limited purposes such as seniority and Time Bound Promotion/Assured Career Progression.

Accordingly, the High Court upheld and confirmed the order passed by the Industrial Court.

List of Cases Referred to

• Dwijen Chandra Sarkar v. Union of India [1999] 2 SCC 119 (para 13)
• Union of India v. V. N. Bhat 2003 taxmann.com 4069 (SC) (para 13)
• Union of India v. M. Mathivanan 2006 taxmann.com 2685 (SC) (para 13).

The post Ad Hoc Promotion Service Counts for Seniority – Break Held Unfair | HC appeared first on Taxmann Blog.

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CA Sagar Gambhir – [2026] 185 taxmann.com 458 (Article)

From 1 April 2026, India’s tax landscape changed in a way that directly benefits millions of salaried employees. The Income Tax Act 2025 replaced the Income Tax Act 1961, and the Income Tax Rules 2026 replaced the Income Tax Rules 1962, both effective Tax Year 2026-27. Among the many changes, one stands out for its direct, immediate impact on take-home salary – the meal voucher exemption has been raised from ₹50 to ₹200 per meal and—critically—it is now explicitly available under the new tax regime without any denial or ambiguity. This article critically analyses how Rule 15(5)(a) of the Income Tax Rules 2026 resolves years of uncertainty, what the new conditions are, how to calculate the benefit correctly for Tax Year 2026-27, and whether it is worth restructuring your salary around it.

1. Key Takeaways—Quick Summary

• Income Tax Rules 2026, effective from Tax Year 2026-27, replace Income Tax Rules 1962—Rule 15(5)(a) now governs meal benefit (replacing old Rule 3(7)(iii)).
• The tax-free meal limit has been quadrupled from ₹50 per meal to ₹200 per meal—a first revision in over 25 years.
• Maximum annual tax-free meal benefit is now ₹1,05,600 (₹200 × 2 meals × 22 working days × 12 months).
• The old denial proviso that blocked meal benefits in the new regime has NOT been carried forward in IT Rules 2026—the benefit is now available under the new regime.
• Conditions still apply – vouchers must be non-transferable and redeemable only at specified eating joints—cash allowances remain taxable.
• At the 30% slab, this benefit now saves up to ₹31,680 per year—more than 4x the saving under the old rules.

2. What Changed on 1 April 2026? The New Legal Framework Explained

The Income Tax Act 2025 received Presidential assent and came into force on 1 April 2026. It replaces the Income Tax Act 1961 with a streamlined 536-section statute organised across 23 chapters, written in plain language with logical sequencing.

Simultaneously, the Central Board of Direct Taxes (CBDT) notified the Income Tax Rules 2026—reducing over 500 rules to just 333 rules. These rules govern perquisite valuations, allowances, forms, and procedures for Tax Year 2026-27 (April 1, 2026 to March 31, 2027) onwards.

One of the most significant practical changes in the new rules – the meal benefit valuation rule.

Old Rule – Rule 3(7)(iii) of Income Tax Rules 1962—₹50 per meal (set in 2001, never revised). Explicitly denied to new regime taxpayers via a specific proviso.

New Rule – Rule 15(5)(a) of Income Tax Rules 2026—₹200 per meal. No denial proviso for the new regime. Available under both regimes.

3. What Is Tax Year 2026–27?

Under the Income Tax Act 2025, the old two-term system (Previous Year + Assessment Year) has been replaced by a single unified concept – the TAX YEAR. Tax Year 2026-27 simply means income earned from 1 April 2026 to 31 March 2027. You earn in that Tax Year, you file your return for that Tax Year. This eliminates the previous confusion where income earned in FY 2025-26 was assessed in AY 2026-27.

Note – Returns for income earned in FY 2025-26 are still filed as AY 2026-27 under the old Income Tax Act 1961. The new Act governs Tax Year 2026-27 (from April 2026) onwards.

4. Rule 15(5)(a) of Income Tax Rules 2026—What It Says and Why It Matters

Rule 15(5)(a) of the Income Tax Rules 2026 prescribes the valuation of free food and non-alcoholic beverages provided by an employer. The key provisions are:

1. The value of the food perquisite is based on the actual cost to the employer.
2. The amount not chargeable to tax as a perquisite—i.e., the amount treated as NIL perquisite value—is ₹200 per meal (increased from ₹50 under the old Rule 3(7)(iii)).
3. Conditions for the ₹200 per meal benefit – meals provided during working hours in office/factory premises, OR through non-transferable paid vouchers redeemable only at specified eating outlets.
4. There is no proviso denying this benefit to new regime taxpayers—unlike the old Rule 3(7)(iii) which had an explicit second proviso that blocked the benefit for those opting for Section 115BAC (new regime under the old Act).

This last point is the most critical change. Under the old Act, CBDT had inserted a specific proviso into Rule 3(7)(iii) to deny the meal benefit under the new regime. That proviso does not exist in Rule 15(5)(a) of the Income Tax Rules 2026. The meal benefit is now structurally neutral—it applies regardless of which regime the taxpayer is under.

Click Here To Read The Full Article

The post [Opinion] Meal Voucher Tax Benefit under New Tax Regime | Tax Year 2026-27 appeared first on Taxmann Blog.

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IFSC FAQs dated 13.04.2026

The International Financial Services Centres Authority (IFSCA) has released Frequently Asked Questions (FAQs) on the IFSCA (Global In-house Centres) Regulations, 2025, providing clarity on the regulatory framework governing GIC Units in IFSCs.

1. What is a GIC Unit?

A Global In-house Centre (GIC) Unit refers to:

• A unit established in an IFSC
• Providing services related to:

1. 1. Financial products
   2. Financial services

• Serving a Financial Institution Group under permitted operating models

2. Eligibility to Set Up GIC Units

Entities qualifying as a Financial Institution Group are eligible to apply for setting up a GIC Unit in IFSC

3. Permissible Structures

A GIC Unit can be established as:

• A company in IFSC
• A Limited Liability Partnership (LLP) in IFSC
• A branch of an entity incorporated outside IFSC

4. Application Process

• Applications must be submitted through the Single Window IT System (SWIT)
• The Authority may grant in-principle approval, subject to compliance with specified conditions

5. Conditions and Timelines

• Applicants must fulfil prescribed conditions within specified timelines
• Final approval is contingent upon compliance with all regulatory requirements

6. Conclusion

The FAQs provide much-needed clarity and operational guidance for entities looking to establish GIC Units in IFSC, supporting the development of a structured, transparent, and globally competitive financial services ecosystem.

Click Here To Read The Full Update 

The post IFSCA Issues FAQs on GIC Regulations 2025 appeared first on Taxmann Blog.

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Case Details: Emerson Process Management (India) Pvt Ltd. vs. Union of India [2026] 185 taxmann.com 141 (Gujarat)

Judiciary and Counsel Details

• A.S. Supehia & Pranav Trivedi, JJ.
• Uchit N Sheth for the Petitioner.
• Shashvata U Shukla, Senior Standing Counsel for the Respondent.

Facts of the Case

The petitioner, a registered assessee engaged in the manufacture of safety valves and components, was registered under GST in multiple States and underwent a court-approved amalgamation under the orders of the National Company Law Tribunal (NCLT). Pursuant to the said amalgamation, the petitioner sought transfer of unutilised input tax credit by filing statutory Form GST ITC-02 as prescribed under the CGST Rules. However, while attempting online filing, the GST portal generated a restriction message stating that the transferee and transferor must be registered in the same State or Union Territory, and the department also endorsed a similar objection on the said form. The petitioner contended that such a restriction was not contemplated under the statute and that, in the absence of an enabling online mechanism, the statutory entitlement could not be defeated, thereby necessitating acceptance of manual filing of Form ITC-02. The matter was accordingly placed before the High Court.

High Court Held

The High Court held that transfer of input tax credit upon amalgamation is expressly governed by Section 18(3) of the CGST Act, read with Rule 41 of the CGST Rules, and neither provision imposes any restriction based on the inter-State nature of amalgamation. It was observed that the portal-based restriction and the departmental endorsement, which introduced a condition not found in the statute, were without legal authority and could not override statutory provisions. The Court further held that the absence of an online facility cannot defeat a substantive right of credit transfer arising upon approved amalgamation. Accordingly, it was concluded that the petitioner was entitled to a transfer of credit, and the authorities were directed to accept and process Form ITC-02 manually in accordance with the law.

List of Cases Reviewed

• Umicore Autocat India (P.) Ltd. v. Union of India [2025] 176 taxmann.com 616 (Bombay)/[2025] 101 GSTL 127 (Bombay) (para 6.5), followed

List of Cases Referred to

• Umicore Autocat India (P.) Ltd. v. Union of India [2025] 176 taxmann.com 616 (Bombay)/[2025] 101 GSTL 127 (Bombay) (para 2).

The post Inter-State ITC Transfer on Amalgamation Allowed – Portal Restriction Invalid | HC appeared first on Taxmann Blog.

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1. Query

Gamma Limited (hereinafter referred to as ‘the Company’), is a public sector undertaking incorporated with the primary objective of executing railway infrastructure projects. The Company has been established as a joint initiative of the Ministry of Railways (MoR) and a State Government, with the Ministry of Railways being the majority stakeholder. The Company functions as a project implementation agency for railway infrastructure development.

As per the governing arrangements between the Company and the Ministry of Railways, the Company undertakes the execution of infrastructure projects on behalf of the Railways. In such cases, the assets created under these projects are owned by the Railways, and the Company merely acts as an executing agency. Accordingly, expenditure incurred on such projects is not recognised as assets in the books of the Company.

Separately, pursuant to specific policy guidelines issued by the Ministry of Railways, the Company constructed residential quarters on land owned by the Railways using its own funds. As per these guidelines, the Company is required to bear the entire cost of construction, while the ownership of both land and constructed structures continues to vest with the Railways.

In consideration of such construction, 50% of the residential units are licensed to the Company for a period of 30 years at a nominal lease rent, while the remaining units are retained by the Railways for their own use. The licensed units are primarily used by the Company for accommodating its employees. The Company also has limited rights regarding allocation and usage of such units, subject to overall regulatory control of the Railways.

The Company has capitalised the entire construction cost incurred on these residential units as property, plant and equipment under leasehold premises and is amortising the same over the lease period, on the basis that the expenditure enables it to derive economic benefits through usage rights over the licensed premises.

In view of the above, the issue for consideration is whether the accounting treatment adopted by the Company, i.e., capitalisation of construction cost as property, plant and equipment and its amortisation over the lease term, is in compliance with Ind AS, and if not, what would be the appropriate accounting treatment and presentation.

2. Relevant Provisions

Ind AS 116 – Leases

Para 9 of Ind AS 116

At inception of a contract, an entity shall assess whether the contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

Para B9 of Ind AS 116

To assess whether a contract conveys the right to control the use of an identified asset for a period of time, an entity shall assess whether, throughout the period of use, the customer has both of the following:

(a) the right to obtain substantially all of the economic benefits from use of the identified asset; and

(b) the right to direct the use of the identified asset

Para B13 of Ind AS 116

An asset is typically identified by being explicitly specified in a contract. However, an asset can also be identified by being implicitly specified at the time that the asset is made available for use by the customer.

Para 22 of Ind AS 116

At the commencement date, a lessee shall recognise a right-of-use asset and a lease liability.

3. Analysis

In the present case, although the Company has incurred the construction expenditure, the ownership of both land and structure remains with the Ministry of Railways at all times. Further, the Company does not obtain legal title or unfettered control over the constructed quarters. The rights available to the Company are limited to usage for a specified period and are subject to policy restrictions imposed by the Railways. Accordingly, the essential condition of control over the asset is not satisfied. Therefore, the construction cost cannot be recognised as property, plant and equipment.

Further, the substance of the arrangement between the Company and the Railways needs to be evaluated. The Company incurs construction costs and, in return, obtains the right to use a specified portion of the constructed residential units for a defined period at a nominal lease rent. This indicates that the consideration paid by the Company is not merely for construction, but effectively for obtaining usage rights over the premises.

In terms of Ind AS 116, a contract contains a lease if it conveys the right to control the use of an identified asset. In the present case, specific residential units are identifiable, and the Company has the right to use such units for a period of 30 years.

Further, the Company has the right to obtain substantially all economic benefits arising from the use of such units within the defined scope, such as use for accommodation of employees and officials. Additionally, the Company has the ability to direct the use of such units, including decisions regarding allocation and utilisation, albeit within the framework of Railway policies. These restrictions are in the nature of protective rights and do not negate the Company’s control over the use of the asset.

Accordingly, the arrangement satisfies the conditions of a lease under Ind AS 116, and the Company should account for the same as a lessee.

With regard to the construction costs incurred, it is necessary to determine their nature. In substance, such costs represent consideration paid by the Company for obtaining the right to use the underlying asset. Ind AS 116 requires that payments made for acquiring the right to use an asset, irrespective of timing, be included in the measurement of the right-of-use asset.

At the commencement date, the Company should recognise a right-of-use asset and a corresponding lease liability. The cost of the right-of-use asset should include the construction cost incurred (or the fair value of consideration, as the case may be), along with other components specified under Ind AS 116.

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