Provision for depreciation on assets purchased but not used

during a particular year.

1.A company purchased two power capacitators for Rs. 5,660/ – in the month of December 1980. However, the company did not consider it necessary to provide for any depreciation on the capacitators in its accounts for the year ended March 31, 1981 because these were not drawn from the stores for installation and, thus, were not used by the company during that year.

2. The statutory auditors of the company qualified their report as follows:

“The Company has not provided depreciation on two power capacitators of value Rs. 5,660/-. The same is contrary to normally accepted accounting principles. The amount of depreciation not provided is Rs. 165/-. To this extent profits have been over-stated and the value of fixed assets in the Balance Sheet has been over-stated.”

3. In a subsequent communication to the company the auditors pointed out that they had relied upon the opinion of the Company Law Board, reproduced on page 729 of the 9^th Edition of ‘Guide to the Companies Act’, by A. Ramaiya as follows:

“Since according to accepted accounting principles, depreciation also arises out of efflux of time, it would be necessary for the purpose of section 205 to provide for depreciation even in respect of assets which are not in use during any financial year, if it proposes to declare to pay dividend for that year.”

4. The querist sought the opinion of the Committee on whether depreciation on the power capacitators arises due to efflux of time in view of the fact that these remained in the stores in brand new condition till March 31, 1981; and whether it was obligatory for the company to provide depreciation on these assets.

Opinion August 13,1982

1.The Committee is of the view that as soon as an item of plant and machinery is installed and is fit for use, depreciation should be provided. However, since the items under question were not installed and were thus not ready for begin put to use, it was not necessary to provide depreciation on them.1

2. Regarding the Company Law Board opinion on which the auditor of the company has relied, the Committee is of the view that apparently it relates to plant and machinery already installed but not in use for the whole of part of any financial year, due to reasons like strike, lock-out, shortage of raw-materials etc. The plant and Machinery will be used when such situations cease to exist and because of this the plant and machinery is normally ready for use.

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1 For a detailed discussion see Whittle Anderson Ltd v CIT (79 ITR 613).