1.11     Query

Provision for depreciation u/s 205(2)(b) of the Companies Act, on energy saving devices

on which 100% depreciation rate is applicable under the Income-tax Rules, as amended

1.A public sector company has installed, during the financial year 1983-84, a coal-fired boiler with thermal efficiency of more than 75%. This Boiler falls in the category of energy saving devices on which 100% depreciation rate is applicable as per Appendix I of Income-tax Rules as amended by the Income-tax (Fourth Amendment) Rules, 1983, with effect from 2.4.1984.

2.The querist is of the view that 100% depreciation on energy saving devices in the year of their installation is an incentive to induce the industries to step-up self-generation of steam and electricity required by them, and therefore, it is not based on the cardinal principal of wear and tear as enunciated in Section 205(2)(b) of the Companies Act.

3.The querist has sought the opinion of the Expert Advisory Committee as to whether depreciation on the said coal-fired boiler should be provided at 100% as prescribed under the Income-tax Rules or at the prescribed rate of depreciation i.e. 15%.

                                              Opinion                                                            September 20,1984

1.The Committee notes that the Research Committee of the Institute in its Note on ‘Provision for Depreciation’1 has recommended as below:

“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 Section 350 or Section 205(2), the company should provide depreciation at such higher rate but if the rate so arrived at is lower than the rate mentioned in these sections, then the company should provide depreciation at the rates mentioned in those sections since these represent the minimum rate of depreciation to be provided.”

2. The Committee also notes that Section 350 of the Companies Act, provides as below:

“The amount of depreciation ……… shall be the amount calculated with reference to the written-down value of the assets as shown by the books of the company at the end of the financial year ………. at the rate specified for the assets by the Income-tax Act (1961) and the rules made thereunder for the time being in force, as normal depreciation including therein extra and multiple shift allowances but not including therein any special, initial or other depreciation or any development rebate, whether allowed by the Act or those rules or otherwise.”

3.On strict interpretation of the above paragraphs, the Committee is of the view that the depreciation on energy saving devices in respect of which 100% rate is prescribed in the amended Income-tax Rules should be provided at that rate i.e. at 100% for the purposes of Section 205(2) of the Companies Act.

4.On the basis of the above considerations, the Expert Advisory Committee is of the opinion that the rate of depreciation on the boiler installed by the Company, which falls in the category of energy saving devices should be 100%. The Committee, however, wishes to draw the attention of the querist to the following Note issued by the Company Law Committee which is published at page 128 of the August, 1984 issue of the Journal ‘The Chartered Accountant’ on ‘Depreciation on Energy Saving/Pollution Controlling devices’:

“In the 1983 budget, the Finance Minister has increased the rate of depreciation admissible under the Income-tax Rules for Energy Saving Devices to 100% and for Pollution Control Equipments to 30%. The necessary amendments had been made vide Income-Tax (Fourth Amendment) Rules, 1983. However, this change has created a difficult situation for some companies who are required to provide depreciation in their books of accounts in accordance with Section 205 and Section 350 of the Companies Act, 1956. A representation was made by the Institute to the Central Government that a suitable clarification should be issued by the Government regarding special depreciation rates recommended for Energy Saving Devices/Pollution Control Equipment vis-à-vis Section 205 and Section 350 of the Companies Act. The Department has informed the Institute that if any hardship is felt by a company in complying with the requirements of the aforesaid provisions, it can apply to the Company Law Board for relaxation under Section 205(2)(c) of the Companies Act.”

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1 Compendium of Notes (1982) page 1, issued by the Research Committee of the Institute of Chartered Accountants of India.