Query No. 19
Subject: Whether depreciation during construction period of a power project should be calculated in accordance with Schedule XIV to the Companies Act, 1956 or as per the Electricity (Supply) Act, 1948.[1] A. Facts of the Case
1. Among the main objects to be pursued by a company are “to plan, promote, organise and execute” a hydroelectric project and “to carry on the business of purchasing, selling, importing, exporting, producing, trading, manufacturing or otherwise dealing in all aspects of planning, investigation, research, design and preparation of preliminary, feasibility and definite project reports, construction, generation, operation and maintenance of hydroelectric projects, transmission, distribution and sale of hydroelectric power, hydroelectricity power development, ancillary and other allied industries and for that purpose to install, operate and manage all necessary plants, establishments and works.”
2. The company is presently executing a hydro power project which is expected to be commissioned by March, 2002. The main civil works of the project i.e., dam, tunnel, surgeshaft and power house, are being executed through different joint ventures of Indian and foreign construction companies.
3. The company is charging depreciation on fixed assets at the rates specified in Schedule XIV to the Companies Act, 1956. The accounting policy of the company in this regard reads as under:
“Depreciation on the fixed assets is provided on straight line method and in the manner provided in Schedule XIV to the Companies Act, 1956. The company shall provide depreciation as per Electricity (Supply) Act, 1948 after commencement of electricity generation.”
4. According to the querist, while conducting the audit of the accounts of the company for the year 1997-98, the government auditors expressed their disagreement regarding charging of depreciation at the rates specified in Schedule XIV to the Companies Act, 1956. The government auditors were of the opinion that depreciation should have been charged in accordance with the provisions of the Electricity (Supply) Act, 1948 and that the adoption of the depreciation rates as per Schedule XIV had resulted in understatement of depreciation and overstatement of net block of fixed assets by Rs. 156.82 lakh.
5. The querist has made a reference to section 616 of the Companies Act, 1956, which reads as under:
“616. Application of Act to insurance, banking, electricity supply and other companies governed by special Acts.-- The provisions of this Act shall apply
......
(c) to companies engaged in the generation or supply of electricity, except in so far as the said provisions are inconsistent with the provisions of the Indian Electricity Act, 1910, or the Electricity (Supply) Act, 1948;
.....”
The querist has contended that as per section 616(c) above the provisions of the Electricity (Supply) Act, 1948 are applicable only to companies which are actually engaged in generation or supply of electricity. Since, at present, the company is not engaged in generation or supply of electricity, the rates of depreciation as prescribed under Schedule XIV to the Companies Act, 1956 would apply to the company and not the rates specified under the Electricity (Supply) Act, 1948. The querist is of the opinion that the rates under the Electricity (Supply) Act, 1948, would apply to the company only when it commences the generation of electricity.
B. Query
6. The querist has sought the opinion of the Expert Advisory Committee as to which depreciation rates, whether those specified under Schedule XIV to the Companies Act, 1956, or those under the Electricity (Supply) Act, 1948, are presently applicable to the company.
C. Points Considered by the Committee
7. The Committee notes that sub-section (4-A) of section 2 of the Electricity (Supply) Act, 1948, defines a ‘generating company’ as “a company registered under the Companies Act, 1956 (1 of 1956) and which has among its objects the establishment, operation and maintenance of generating stations”.
8. The Committee also takes note of the provisions of sub-sections (2) and (3) of section 75A of the Electricity (Supply) Act, 1948, relating to annual reports and accounts of generating companies. These sub-sections read as under:
“(2) A Generating Company shall, as soon as may be, after the end of each year, prepare a report giving an account of its activities during the previous year and shall, within six months from the date of closure of the year, forward to the competent government, or where there are more than one competent government, to all such competent governments, the report together with a statement of accounts, in such form and containing such particulars as may be specified by the competent government or the competent governments, as the case may be, a copy of the balance sheet and profit and loss account and the auditor’s report, in relation to the accounts of the year aforesaid.”
“(3) For the purpose of preparing the statement of accounts referred to in sub-section (2), the depreciation to be provided every year shall be calculated at such rate as may be specified by the Central Government, by notification in the Official Gazette, in accordance with the provisions of Section 43A.”
9. Considering the main objects of the company as described in paragraph 1 above, the Committee is of the view that the company is a ‘generating company’ within the meaning of the Electricity (Supply) Act, 1948 and as such attracts the provisions of section 75A of the said Act. This implies that the company has to provide depreciation at the rates prescribed under the said Act.
10. The Committee also takes note of the provisions of section 616 of the Companies Act, 1956. The Committee, however, does not agree with the contention of the querist that under this section, the provisions of the Electricity (Supply) Act, 1948, would apply to a company only when it commences generation of electricity. The Committee is of the view that the provisions of the Electricity (Supply) Act, 1948 and those of the Companies Act, 1956 have to be given a harmonious interpretation. Accordingly, since the company clearly attracts the provisions of section 75A of the Electricity (Supply) Act, 1948, whose requirements are inconsistent with those of the Companies Act, 1956, a harmonious interpretation of the provisions of the aforesaid two statutes would suggest that Schedule XIV to the Companies Act, 1956, is not applicable to the company. In this regard, the Committee also notes that the title of section 616 of the Companies Act, 1956, is ‘Application of Act to insurance, electricity supply and other companies governed by special Acts’. Thus, the intention of the legislature in laying down the section seems to be to ensure that those companies which are governed by the special Acts should comply with the requirements of those Acts rather than with the requirements of the Companies Act, 1956, insofar as there is an inconsistency between the requirements of the special Act(s) and those of the Companies Act, 1956.
D. Opinion
11. Based on the above, the Committee is of the opinion that the rates of
depreciation applicable to the company are those prescribed under
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[1] Opinion
finalised by the Committee on 28.5.1999.
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