3.      COMPANIES ACT AND ALLIED ISSUES

3.1       Query

Interpretation of some provisions of Schedule VI to the

Companies Act, 1956—1.

A Private Limited Company has got on reserve account styled as “depreciation Reserve”. On enquiry it is revealed that excess provision made in years prior to commencement of Companies Act, 1956, forms the said “Depreciation Reserve”. The amount to the ercdit of the said “Depreciation Reserve” is, say Rs. 51,000/- only.

he Company has got a debit balance in Profit and Loss Account, say Rs. 24,000/-.

The problem is:--In view of the credit balance in the Depreciation Reserve Account, which is formed out of the excess provision made during the years prior to commencement of the Companies Act, 1956, how the debit balance of Profit and Loss Account should be presented in the Balance Sheet of the Private Limited Company, which is required to be submitted in the Form prescribed in Schedule VI of the Companies Act, 1956? The reference to the Companies Act, 1956, should be to that Act as applicable prior to its amendment by the companies (Amendment) Act, 1960.

                                                                     Opinion                                          January 18,1960

The opinion of the Expert Advisory Committee is as follows: -

1.         It is observed that the Company has only one Reserve Account called “Depreciation Reserve”, and that such reserve represents excess provision made prior to the commencement of the Companies Act, 1956.  In the first place, the querist must be satisfied on proper data being produced by the Company that the reserve does in fact represent depreciation written off in excess which is no longer necessary and then only may he consider the “Depreciation Reserve” to be a free reserve.

2.         The Company has a debit balance of approximately Rs. 24,000/- in its Profit and Loss Account. Although on a strict reading of item VI(5) (Assets Side) of the form of Balance Sheet laid down in Part I of Schedule VI, it would appear that the debit balance of Profit and Loss Account can only be set off against the General Reserve. In view of what is stated in Item II(3), on the Liabilities side, it is suggested that the debit balance in the Profit and Loss Account should be deducted from any reserve, whatever the designation.

3.         It would be preferable if the querist could induce his clients to transfer the “Depreciation Reserve” to a General Reserve and then set off the debit balance in the profit and Loss Account thereagainst.

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