Query No. 26

Subject:

Extra-shift depreciation on jetty and handling

equipments used at seaports.¹

A. Facts of the Case

1. A private limited company is engaged in the business of operating a port on Build, Own, Operate and Transfer (BOOT) basis. It has taken on lease for 30 years, a berth from the government. The company has constructed a jetty and has installed various handling equipments for handling bulk cargo such as ore, coal, etc. During the year 2004-05, the port was in operation for the entire year since it had started commercial operation from second week of March, 2004.

2. The company has two types of operations. First operation involves unloading the cargo from the ship on to the stock-yard using ship unloader, conveyors, stacker, etc. and the second operation involves recovering materials from the stock-yard and loading of the materials in the railway wagons using reclaimer, conveyor, wagon loader, etc.

3. The queist has stated that the company operates on a 12 hour shift basis and works for 2 x 12 = 24 hours when there is necessity for clearing the ships. During the year 2004-05, the facility has worked for 170 days on 24 hours basis and on all other days for one shift of 12 hours only. As per the equipment manufacturer’s specifications, the life of these equipments used in the port operations is between 15 to 18 years, working on full capacity with proper maintenance.

4. According to the querist, the auditor of the company opines that depreciation on all items of plant and machinery at the port needs to be provided on shift basis as per the rates given in Schedule XIV to the Companies Act, 1956, taking 8 hours or part as a shift.

5. The company proposes to provide for depreciation at the rate specified for general plant and machinery in Schedule XIV to the Companies Act, 1956, as no specific rate has been given for plant and machinery used in seaports. Further, the company works for two shifts of 12 hours on certain days and one shift of 12 hours on other days. The 12 hours shift has been accepted by the port authorities for the facility.

B. Query

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

(i) Whether the rate of depreciation applicable to general plant and machinery is correct for the plant and machinery used in port as there is no specific rate given under Schedule XIV to the Companies Act, 1956.

(ii) Whether extra-shift allowance is permitted for jetties and handling equipments installed at the port. (As per clause 8(f) of Note No.6 of Schedule XIV to the Companies Act, 1956, no extra-shift depreciation is permitted for jetties and dry docks installed by mineral oil concerns for field operations)

(iii) Whether working should always be based on 8 hours working or it can be 12 hours as per the particular industry practice and accordingly, whether pro-rata depreciation for extra-shift can be provided.

(iv) Whether there is any other method or rate that can be adopted/ applied for the plant and machinery used in port operations. Whether the life of the asset can be considered as a fair method for writing down the value of the asset.

C. Points considered by the Committee

7. The Committee notes clause 6 of Notes to Schedule XIV to the Companies Act, 1956, which, inter alia, reads as follows:

“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.”

8. The Committee notes that the term ‘shift’ has not been defined under the Companies Act, 1956. Therefore, in the view of the Committee, for the purposes of this Act, the term ‘shift’ has to be construed, as it is understood in the common commercial parlance. In this context, the Committee notes section 2(r) of the Factories Act, 1948, which defines the term ‘shift’ as follows:

“2(r) where work of the same kind is carried out by two or more sets of workers working during different periods of the day, each of such sets is called a “group” or “relay” and each of such periods is called a “shift”.”

9. The Committee notes from the above and the practice followed by the company that the basic feature of the system of extra shifts is employment of a different set of workers for the period additional to the normal working hours. The Committee is of the view that generally, the shift system is operative for a certain number of consecutive working days and not for extra hours worked on isolated working days. The extra hours worked by the same set of workers is generally termed and treated as over-time and is not referred to as ‘shift’. The Committee is of the view that if the same set of workers has worked for 12 hours at a stretch, the ‘shift’ would be construed to be of 12 hours only. Two shifts of 12 hours each can not be said to be equal to three shifts of 8 hours each for the purpose of charging depreciation. The calculation of a shift has to be with reference to a working day and the computation of extra-shift depreciation should be worked out on the basis of number of days for which the ‘concern’ worked double shift.

10. From the above, the Committee is of the view that the company under consideration can be said to be working on double shift, and not on triple shift on the basis of number of hours worked in each shift.

11. The Committee notes that Schedule XIV to the Companies Act, 1956 does not prescribe any specific rate of depreciation for jetties and other handling equipments installed at the port. The Committee is of the view that in the absence of any specific rate of depreciation, the general rate of depreciation, applicable to ‘plant and machinery’, as prescribed under the Schedule should be applied.

12. The Committee further notes paragraphs 8 and 9 of the Guidance Note on Accounting for Depreciation in Companies, issued by the Institute Chartered Accountants of India, which provide as follows:

“8. A question may arise as to whether it is obligatory on a company to provide for depreciation only on the basis mentioned in Section 205(2) read with Section 350 and Schedule XIV of the Act or whether these bases can be considered as indicating the minimum depreciation which must be provided by the company, insofar as the accounts of the company are concerned and insofar as it is required to exhibit a true and fair view of the state of affairs of the company as on a given date and of the profit or loss for the year.

9. The Committee is of the view that in arriving at the rates at which depreciation should be provided the company must consider the true commercial depreciation, i.e., the rate which is adequate to write off the asset over its normal working life. If the rate so arrived at is higher than the rates prescribed under Schedule XIV, then the company should provide depreciation at such higher rate but if the rate so arrived at is lower than the rate prescribed in Schedule XIV, then the company should provide depreciation at the rates prescribed in Schedule XIV, since these represent the minimum rates of depreciation to be provided. Since the determination of commercial life of an asset is a technical matter, the decision of the Board of Directors based on technological evaluation should be accepted by the auditor unless he has reason to believe that such decision results in a charge which does not represent true commercial depreciation. In case a company adopts the higher rates of depreciation as recommended above, the higher depreciation rates/lower lives of the assets must be disclosed as required in Note No. 5 of Schedule XIV to the Companies Act, 1956.”

13. From the above, the Committee is of the view that a company may provide higher rates of depreciation than the rates prescribed under Schedule XIV, if these rates represent the true commercial depreciation on the basis of technological evaluation. However, in that case, the company will have to give proper disclosures as required in Note No. 5 of Schedule XIV to the Companies Act, 1956.

D. Opinion

14. On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 6 above:

(i) Yes, since Schedule XIV to the Companies Act, 1956, has not prescribed any specific rate of depreciation for jetties and other handling equipments used at seaports, the general rates applicable to plant and machinery may be applied on double shift basis for the proportionate number of days as required under clause 6 of Notes to Schedule XIV.

(ii) Extra-shift allowance may be applied for jetties and handling equipments as stated in (i) above.

(iii) Please refer paragraphs 9 and 10 above.

(iv) Please refer paragraphs 12 and 13 above.

¹ Opinion finalised by the Committee on 20.10.2005