3.10     Query

Procedure for Deduction of Depreciation from Assets under Industries(Development &Regulation)Act,1951, vis-a-vis Schedule VI of the Companies Act, 1956.

The Central Government have also issued directions to the Authorised Controller under Sub-Section 4 of Section 18 B of the Industries (Development & Regulation) Act, 1951.

One of such directions issued reads as under:

“The Authorised Controller shall maintain a separate depreciation fund in the manner mentioned below: -

The Authorised Controller shall pay into the fund depreciation in respect of the buildings as well as engines, boilers, machinery, plant, apparatus, fixtures, furniture and other movable assets included in the mills and ancillary offices under his control (hereinafter referred to as “the said assets”) on the written down value thereof at the date of the commencement of his management at the rates and according to the provision contained in the Income-tax Act, 1961, proportionate to the period during which the management lasts, provided that expenditure on major items of repairs and/or replacements to the said assets, only to the extent to which the same is appropriated or set off by the Authorised Controller against the amount of depreciation under the proviso next hereafter contained, shall be added to the written down value of such assets in respect of which and at the time when such expenditure is incurred and accordingly the depreciation will be payable by the Authorised Controller on such increased written down value from the date on which expenditure is incurred; provided further that the Authorised Controller shall be entitled to appropriate the amount of expenditure incurred by him or a sum of Rs. 50,000/-(Rupees fifty thousand)  whichever is less, provided also that the Authorised Controller shall obtain previous consent of the Central Government before expending moneys on such major or extraordinary items of repairs and/ or replacements to be so appropriated or set off where such expenditure on any single  item of major or extraordinary or repairs and/or replacement exceeds Rs. 5,000/- (Rupees five thousand).”

I would like to know, under the above circumstances and in view of the above direction, while preparing the Balance Sheet of the said company, whether the Fixed Capital Expenditure (Assets) should be shown without deducting the depreciation for the period for which the company is governed under the said Industries (Development & Regulation) Act, 1951, and a separate Depreciation Fund equivalent to the amount of depreciation for the period covered, should be shown on the liability side or the Fixed Assets to be shown in the usual manner as required by Schedule VI of the Companies Act.

My interpretation of the direction is that the amount of depreciation be not deducted from the Assets, but Assets would be shown on the written down value of the last year, and a depreciation fund for the amount of depreciation be shown on the liability side.

                                                   Opinion                                        July 14, 1965

The Committee is of the view that, in the Company’s Balance Sheet, the Fixed Assets should be shown at their cost or gross book values and the total depreciation under each head should be shown as a separate deduction, as required by Schedule VI of the Companies Act, 1956.

The Committee has confined its reply to the query raised and has not concerned itself with any other questions which may arise on the interpretation of the Directions given by Authorised Controller.

All the relevant facts have not been set out by the querist. Further information would be needed on the following points: -

(a)The relevant provisions of the Articles of Association of the Company.

 

(b)The dates of : (1) the original declaration of the dividend ; (2) transfer to the Reserve; (3)set –off of the credit balance on the reserve against the accumulated losses; and (4) the claim by the shareholders.

 

(c) Wherher the Reserve Account was closed by transfer of the credit balance on it to the Profit and Loss Account or there was merely a set-off for the presentation in the Balance Sheet.

 

(d) Whether in law, the dividend is currently a liability of the company at the date of contemplated payment.

The Committee considers that the answer to the first question, namely whether the company can pay such dividend by charging the current profits with the said amount, i.e. before arriving at the balance of profit for the current year, is in the negative.

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