1.10  Query:    

Calculation of pro-rata depreciation for extra shift workings

on additions/deletions of plant and machinery.

1. A company is having 6 composite textile mills and 8 spinning mills engaged in production and marketing of yarn and cloth. The mills are working all the 3 shifts on all the working days except national and festival holidays.

2. The company is accounting the depreciation on straight line method at the rates prescribed in Schedule XIV to the Companies Act. The querist has stated that it claims depreciation on the additions/deletions of plant & machinery as below:

(i)    Normal depreciation in proportion to the number of days from the date of commissioning of plant till 31^st March to the total number of days in the year of working (365 days or 366 days as the case may be).

(ii)    Extra shift depreciation on the additions/deletions of machinery in proportion to the number of days from the date of commissioning of plant till 31^st March to the total number of available days from the date of commissioning till 31^st March or 240 days whichever is higher.

(iii)    The querist has stated that since all the mills have worked all the three shifts in all the working days during the year 1993-1994 the company has not calculated pro-rata depreciation separately for double shift working and triple shift working, i.e., it has claimed extra shift depreciation for triple shift working.

3. The querist has given an illustration for the procedure followed during the year 1993-1994 in claiming the proportionate depreciation on additions/deletions of plant and machinery as below:

ILLUSTRATION –I                                                    Plant & Machinery commissioned

                                                                                    during 1993-94

                                                                             Plant –A                      Plant – B

4. The querist has stated that another opinion seems to prevail that in respect of additions/deletions extra shift depreciation shall be claimed in proportion to the number of days the plant actually worked extra shifts from the date of commissioning of the plant till 31^st March bears to normal number of days the mills actually worked during the year, i.e., 355 days. Hence, as per this view, the number of days adopted for both Plants A & B as denominator in S. No. 6 above shall be (365 – 10 days) 355 days and not 274 days or 240 days. If this view is applied to the above illustration, the working of normal depreciation, extra shift depreciation and total depreciation will be as under: -

5.   It could be seen from the above illustrations that the company is in agreement with this in respect of normal depreciation claimed on both Plants A & B. The dispute arises only with regard to calculation of the depreciation for extra shift working.

6. In the light of the above information and illustrations, the querist has sought the Expert Advisory Committee’s opinion on whether extra shift depreciation in respect of additions/deletions should be calculated on the basis of (a) or (b) below:

(a)   Claim extra shift deprecation in proportion to the actual number of days the plant worked extra shift from the date of commissioning till 31^st March bears to the normal number of days the mills actually worked in the year (365 days less the days the factory not worked on account of strikes/holidays).

(b)   Claim extra shift depreciation in proportion to the actual number of days the plant worked extra shift from the date of commissioning till 31^st March to the total number of days available from the date of commissioning till 31^st March or 240 days whichever is higher. 

              (c)    Which of the illustrations mentioned above (I) or (II) is correct.

                                                                          Opinion                                          July 14, 1995

1. The Committee notes clauses 4 and 6 of Notes to 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 depreciation 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 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 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 Schedule XIV to the Companies Act, 1956, requires that normal number of working days during the year would be the number of days on which the factory or ‘concern’ actually worked during the year. Thus, it is not the working days of individual plant and machinery items which should be considered for the purpose of computing extra shift depreciation.

3. On the basis of above, the Committee is of the opinion that in the present case, for calculating extra shift depreciation on addition to plant items of an existing factory or a concern, the normal number of working days for the concern or factory as a whole should be considered.

_________________________________