Query No. 21 Subject: Depreciation rate applicable to crushing plant situated on mining lease area.1 A. Facts of the Case
1. A government company is engaged in mining and selling of rock phosphate, gypsum and limestone. The rock phosphate mines and limestone mines are situated at different places.
2. The rock phosphate mines are open cast mines and the rock phosphate is excavated in R.O.M. (Run of Mine) form from the pit mouth. The R.O.M. materials are transported to the crushing plant situated within the mining lease area and are being crushed into half-inch chips which are, in turn, sold to super phosphate manufacturers. The rock phosphate is saleable in crushed form only. There are two crushing plants, one was installed in 1974-75 and the other in the year 1991-92. Both the crushing plants are being operated in three shifts since their installations.
3. As per the querist, the company has many mining machineries, such as excavator, dumper, drill, dozer, crushing plants and ancillary equipment. The crusher is also treated as a part of mining machinery.
4. The mining operations in rock phosphate mines are being carried out in three shifts and both the crushing plants are also being operated in triple shifts. The company is providing depreciation on both the crushing plants @ 13.91%, considering them part of surface mines machinery, as mentioned in point no. 11 of note no. 6 of Schedule XIV to the Companies Act, 1956.
5. The company mines and sells low silica limestone in crushed form (gitti) to the steel plants. In this case, R.O.M. is transported to crushing and screening plant situated within the lease area. In the process of crushing and screening nearly 40% of the feed material is rejected and balance material is crushed into gitti and despatched to the steel plants. The crushing and screening plant was installed in the year 1993 and the company has been charging depreciation on single shift basis @ 13.91% considering the same as part of surface mining machinery. The querist has mentioned that the company sells limestone to the steel plants in gitti form, as there is no market for the limestone to the steel plants in gitti form, as there is no market for the lime stone in Run of Mines (as excavated from mines) form.
B. Queries
6. The querist has sought the opinion of the Expert Advisory Committee on the following issues:
(a) In case of rock phosphate mines, whether the company is correct in charging depreciation on crushing plant installed within the mining lease area as surface mining machinery on single shift basis which is being followed since inception, i.e., from 1974-75, as the rock phosphate ore is sold only after crushing of the material through crushing plant.
(b) In case the depreciation is required to be provided on shift basis, whether it would be sufficient to give a note in the annual accounts of the company for not providing past years’ arrears of depreciation on shift basis.
C. Points Considered by the Committee
7. The Committee notes that note no. 6 (point no. 11) of Schedule XIV to the Companies Act, 1956 provides as below: “The extra shift depreciation shall not be charged in respect of any item of machinery or plant which has been specifically excepted by inscription of the letters “NESD” (meaning “no extra shift depreciation”) against it in sub-items above and also in respect of the following items of machinery and plant to which the general rate of depreciation of 13.91 percent applies – Mines and quarries:
(a) Surface and underground machinery (other than electrical machinery and portable underground machinery)”.
8. The Committee notes that the rate of depreciation and the availability of extra shift depreciation in case of the crushing plant situated within the mining lease area would depend on whether or not it is covered under point no. 11 of note no. 6 of Schedule XIV stated above.
9. The Committee is of the view that the issue whether the crushing plant situated within the mining lease area constitutes a surface machinery within the meaning of Schedule XIV (point no. 11) to the Companies Act, 1956, for the purpose of charging depreciation is a matter of pure interpretation of relevant legal provisions and a technical assessment as to whether the activity of crushing under the given circumstances constitutes mining or not; if yes, whether the crushing plant would constitute a ‘surface machinery' or not. Accordingly, the company should obtain legal opinion and technical evaluation from the relevant experts.
10. The Committee notes the definition of ‘prior-period items’ and paragraphs 15 and 19 of Accounting Standard (AS) 5, ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’, which state as below:
“Prior period items are income or expenses which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods.”
“15. The nature and amount of prior period items should be separately disclosed in the statement of profit and loss in a manner that their impact on the current profit or loss can be perceived.”
“19. Prior period items are normally included in the determination of net profit or loss for the current period. An alternative approach is to show such items in the statement of profit and loss after determination of current net profit or loss. In either case, the objective is to indicate the effect of such items on the current profit or loss.”
11. From the above, the Committee is of the view that in case depreciation is required to be provided on shift basis on a legal and technical evaluation, the excess depreciation charge pertaining to prior periods would constitute a ‘prior-period item’ in the current year and should be disclosed in the current year’s profit and loss account in a manner that its impact on the current year’s profit or loss can be perceived. The manner of disclosure as described in paragraph 19 of AS 5 makes it amply clear that a mere disclosure by way of a note to the accounts without including it in the profit and loss account will not be sufficient.
D. Opinion
12. On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 6:
(a) Since the issue
involves purely legal interpretation and evaluation of technical aspects as to
whether the activity of crushing under the given circumstances would be
construed as ‘mining’, and if so, whether the crushing plant should be treated
as a ‘surface machinery’ as construed under Schedule XIV to the Companies Act,
1956, the company should obtain a legal opinion and technical evaluation from the relevant
experts.
(b) In case, upon a legal and technical assessment, depreciation is required to be provided on shift basis, a disclosure in respect of non-provision of depreciation on shift basis in past years, merely by way of a note to accounts would not be sufficient. It is required to be provided in the profit and loss account in a manner that its impact on the current year’s profit or loss can be determined clearly with necessary quantification of current year and prior period amounts failing which auditors would be required to qualify their report with necessary details in terms of ‘Statement on Qualifications in Auditor’s Report’, issued by the Institute of Chartered Accountants of India, which is mandatory.
1Opinion finalised by the Committee on 8.8.2000. |