3.11 Query
Interpretation of Section 205 (2) (b) of the Companies Act, 1956. A textile spinning mill is engaged in the manufacture of yarn both from cotton and staple fibre. The mill was started in 1944 as a private company and was converted into a public company in 1962. The company now is a public company with authorise capital of Rs.75,00,000/-and paid up capital of Rs. 25,52,000/- and the accounting year has ended on 31-3-64 which is under Audit.
The company has been charging depreciation on the assets on written down value basis and would continue to do so in respect of these assets which are separately shown in the Balance Sheet as Block “A”.
During the accounting year 1963-64, the company has installed substantial machinery of the value of Rs. 25,00,000/- approximately and the company wants to charge depreciation on this new machinery which will be shown as Block “B” on straight line method. By so doing the company would be able to maintain the same rate of dividend to shareholders as it was in the past.
In our view, the company can charge depreciation on straight line method only on the new machinery installed in the accounting year 1963-64 while at the same time continue to charge depreciation on written down value method in respect of machinery installed upto 31-3-1963 and it is permissible to follow both the written down value as well as straight line method while calculating depreciation in respect of some kinds of machinery shown separately in two Blocks in the books of the Company.
Opinion March 18, 1966
There is no objection to the company charging depreciation on the new machinery installed in 1963-64 on the straight line method, while continuing to charge depreciation on the other machinery on the written down value method. The fact that two separate methods of charging depreciation on two separate blocks of machinery have been employed may under certain circumstances, need to be disclosed on the face of the accounts. The two methods should be consistently followed in subsequently years.
This point is in substance covered by the clarificatory note no. 10(1). CL. VI/61, dated 27th September, 1961, issued by the Department of Company Law Administration, vide Query II (5) therein. [The note is included as Enclosure I in the publication No. H 7 501 7 (Opinion Regarding Certain Provisions of the Companies Act, 1956) already circulated to members]. It is stated there that it would be open to a company to charge depreciation on different bases (straight-line over written down value) on different categories of assets. There is no reason why the same principle should not apply to different blocks in the same category of assets.
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