3.3 Query
Calculation of double shift depreciation under Schedule XIV to the Companies Act, 1956.
1.A public limited company having two manufacturing units, both non-seasonal, had operated partially for 120 days during the year ended 31st March, 1989, one unit under single shift (unit ‘X’) and another unit under double shift (unit ‘Y’). Consequent to the recent amendment by the Companies (Amendment) Act, 1988, the company has chosen to follow straight line method (SLM) of depreciation and adopted the rates prescribed under new Schedule XIV to the Companies Act, 1956. Accordingly, the rates of depreciation applicable to plant and machineries in units ‘X’ and ‘Y’ are 5.15% and 8.09% respectively. According to the querist, if the value of machineries in unit ‘X’ and ‘Y’ is Rs. 5.00 lacs each, the depreciation will be as follows:
i) Depreciation in respect of unit ‘X’
5,00,000 x 5.15/100 = 25,750/-
ii) Depreciation in respect of unit ‘Y’
5,00,000 x 8.09/100 = 40,450/-
2.However, depreciation in respect of unit ‘Y’ is further subjected to note number 6 to Schedule XIV which states as follows:
“The calculation of the extra depreciation for double shift working and for triple shift working shall be made separately in the proportion which the number of days for which the concern worked double shift or triple shift, as the case may be, bears to the normal working days during the year. For this purpose, the normal working days during the year shall be deemed to be-
(a) in the case of seasonal factory or concern, the number of days on which the factory or concern actually worked during the year or 180 days, whichever is greater;
(b) in any other case, the number of days on which the factory or concern actually worked during the year or 240 days which ever is greater…….”
3. In view of the above, the querist is of the view that the depreciation in respect of unit ‘Y’ has to be further restricted to:
40,450 x 120/240 = 20,225
Accordingly, Rs. 20,225 was charged by the company as depreciation for the year 1988-89 in respect of unit ‘Y’.
4.The querist has stated that depreciation computed as per para 3 above falls below the normal depreciation calculated on the basis of single shift.
5.The querist has referred the following issues for the opinion of the Expert Advisory Committee:
(a) Whether the procedure followed by the company for computing double shift depreciation under SLM is correct.
(b) If the procedure is wrong, what is the correct procedure?
(c) If the procedure is correct, how can the depreciation for double shift be less than depreciation for single shift, i.e., normal depreciation?
(d) What is the significance of the phrase appearing in note number 6 given under Schedule XIV to the Companies Act, 1956, namely the “Calculation of extra depreciation for double shift or triple shift working shall be made separately……”, in relation to straight line method?
(e) What is the position as per the Income-tax Act?
Opinion March 29, 1990
1.The Committee is of the view that note number 6 to Schedule XIV to the Companies Act, 1956, prescribes that the extra depreciation for double shift working would be the difference between the depreciation for double shift working and the depreciation for single shift working, adjusted in the proportion which the number of days for which concern worked double shift bears to the normal working days during the year. The extra depreciation for double shift working, so calculated, has to be added to the depreciation for single shift working to arrive at the total depreciation for double shift working. Therefore, the depreciation for double shift working shall be made as under:
Depreciation for single shift working
(Depreciation for Double shift working- Depreciation for single shift working) x (Number of days worked double shift/ Normal working days during the year)
2.The Committee is of the following opinion in respect of issues raised in para 5 of the query:
(a) The procedure followed by the company for computing double shift depreciation under straight line method is not correct.
(b) The correct procedure for calculating double shift depreciation is as under:
25,750.00 + [(40,450.00-25,750.00) x 120/240]
i.e., Rs. 33,100.00
The double shift depreciation under SLM in respect of unit ‘Y’ is Rs. 33,100.00
(c) In view of (a) and (b) above, this query need not be answered.
(d) The significance of note no. 6 to Schedule XIV to the Companies Act, 1956, is explained in para 1 above.
(e) From assessment year 1988-89 and onwards, no extra-shift depreciation is available under the Income-tax Act. The depreciation under the said Act has to be computed in accordance with section 32 of the Income-tax Act read along with Rule 5 of the Income-tax Rules.
_______________________
|