1.26   Query:  

Computation of extra-shift depreciation.

1. A public sector understanding is carrying on the business of producing and selling iron and steel. The company has one integrated steel plant with different ‘plant units’ which are commissioned on different dates. After completion of trial run they are capitalised on different dates.

2. The company works on all days in the year as production is to be made under continuous process, though some of the plant units may not work on certain days during the year on account of waiting for inputs/maintenance and similar other reasons. Overall, every day throughout the year at least one plant unit will be working. The policy of the company for providing extra-shift depreciation is as follows:

“Provision for extra shift working is made considering each Plant/Mill as a separate unit for the purpose of reckoning the number of normal working days during the year.”

3. The querist has stated that note no. 6 of Notes to Schedule XIV to the Companies Act states that the calculation of extra shift depreciation for double/triple shift working shall be made separately in proportion in which the number of days for which the concern worked double/triple shifts as the case may be, bears to the normal number of working days during the year. Normal number of working days shall be the number of days on which the factory or concern actually worked during the year or 240 days whichever is greater.

4. The querist has informed that in the matter of providing for depreciation for extra-shift working, there were certain differences of opinion between the company, the government auditors and the statutory auditors at the time of finalisation of accounts for the last year. The querist has suggested three alternative methods by way of following example, in respect of plant units commissioned during the current year and those commissioned in earlier years:

EXAMPLE

Suggested methods of writing off depreciation for normal and Extra-shifts working:

Rates of depreciation

5. The querist has sought the opinion of the Expert Advisory Committee on the following issues:

(a)        Which of the methods suggested at paragraph 4 above or a combination of more than one alternative method is correct?

(b)        Are the days on which the concerned plant unit has not worked on account of waiting for inputs/maintenance etc., to be treated as the normal working days on which the plant unit worked? The opinion may kindly be given with reference to the suggested methods of calculations given above.

(c)        If the answer to the above is in the affirmative, clarify what constitutes “actual number of working days” given under note no. 6(b) of Schedule XIV to the Act.

                                                                  Opinion                                                 May 4, 1993

1. The Committee notes clauses 4 and 6 Notes to the Schedule XIV to the Companies Act, 1956, which read, inter alia, as follows:

“4.        Where, during any financial year, any addition has been made to any asset, or where any asset has been sold, discarded, demolished or destroyed, the deprecation on such assets shall be calculated on a pro-rata basis from the date of such addition or, as the case may be, up to the date on which such asset has been sold, discarded, demolished or destroyed.”

“6.        The calculations 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 number of working days during the year. For this purpose, the normal number of working days during the year shall be deemed to be-

(a)        in the case of a 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, whichever is greater.”

2. The Committee notes from the above that for working out ‘normal number of working days during the year’, the higher of (a) ‘number of days on which the concern actually worked during the year’, and (b) 180 days in case of seasonal factory or concern and 240 days in other cases, is to be taken. The Committee is of the view that for computing (a), (i.e., the number of days on which the concern actually worked) idle days on account of maintenance etc. for which the factory/concern has worked should be included even though the individual machines/labourers in the factory/concern might not have actually worked during these days. When machines are shut-down for maintenance in a factory/concern, the maintenance work is carried on although no production takes place.

3. On the basis of the above, the Committee is of the following opinion in respect of issues raised in para 5 of the query:

(a)        Alternative ‘A’ given in para 4 of the query appears to be correct, presuming the factory/concern was working as per para 2 above.

(b)        Please see para 2 above.

(c)        Please see para 2 above.

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