1.14 Query
Provision for depreciation under section 205 of the Companies Act, 19561.A Government company proposes to declare dividend for the year 1984-85. The Company is providing depreciation at the rates determined on the following bases:
(i) as prescribed under the Electricity (Supply) Act, 1948;
(ii) as prescribed by Bureau of Public-Enterprises;
(iii) based on technical assessment; and
(iv) as prescribed in the Income-tax Rules.
2.The rates prescribed under the Electricity (Supply) Act, 1948, though approved by the Government of India, have the effect of writing off 90 per cent of the original cost of each depreciable asset. For these assets, rates have been prescribed under the Income-tax Rules.
3.The rates prescribed by Bureau of Public Enterprises, by means of circulars from time to time, have the effect of writing-off 90 percent of the original cost of the depreciable assets, but these rates are a little less than the rates prescribed under the Income-tax Rules.
4.The rates as per technical assessment have the effect of writing-off 95 percent of the original cost within the specified period as arrived at as per Section 205, since these rates are higher than those prescribed under the Income-tax Rules. These rates have no approval of the Government of India.
5.In the above context, the querist has sought the opinion of the Expert Advisory Committee on the following issues:
(i) Whether it can be presumed that the rates prescribed by the Electricity (Supply) Act, 1948 fall under section 205 (2) (c) or (d) of the Companies Act.
(ii) Whether it can be presumed that the rates prescribed by the Bureau of Public Enterprises fall under Section 205(2) (c) of the Companies Act taking BPEs circulars as having the effect of approval by the Central Government.
(iii) Whether the rates based on technical assessment can be presumed to fall under Section 205(2) (b) since these rates are not prescribed under Income-tax Rules and they do not have the approval of the Central Government, but depreciation provided as per these rates is adequate.
(iv) In case the answer to either or all of the above questions is in the negative, whether depreciation should be provided for such item(s) in the books of account itself as per Income-tax Rules for the purpose of declaration of dividend or would it be sufficient if the difference between the depreciation as per books and that as per the above basis is transferred to General Reserve, which would mean that this has not to be declared as dividend.
Opinion 30th April, 1985
1. The Committee notes that section 205 (2) of the Companies Act, 1956, provides as below:
“Depreciation shall be provided either :
(a) to the extent specified in section 350; or
(b) in respect of each item of depreciable asset, for such an amount as is arrived at by dividing ninety-five per cent of the original cost thereof to the company by the specified period in respect of such asset;
(c) in any other basis approved by the Central Government which has the effect of writing off by way of depreciation ninety-five percent of the original cost to the company of each such depreciable asset on the expiry of the specified period; or
(d) as regards any other depreciable asset for which no rate of depreciation has been laid down by the Indian Income-tax Act, 1922, or the rules made thereunder no such basis as may be approved by the Central Government by any general order published in the Official Gazette or by any special order in any particular case”.
2.It is clear from the above, in the view of the Committee, that Central Government can approve a basis for providing depreciation on bases other than those specified in sub-sections (a) and (b), provided, that basis has the effect of writing-off ninety-five percent of the original cost of the asset on the expiry of the specified period [205 (2) (c)] or where no rate of depreciation has been laid down by the Income-tax Act or the rules made thereunder [205 (2) (d)].
3.The Committee further notes that in respect of the assets employed by the company, depreciation rates have been prescribed by the Income-tax Rules. In view of this, clause (d) of sub-section (2) of Section 205 is not applicable.
4. The Committee is of the view that since the rates specified under the Electricity (Supply) Act, 1948, have the effect of writing-off 90 per cent of the original cost of each depreciable asset, Section 205 (2) (c) is not applicable. The Committee notes that the Electricity (Supply) Act, 1948, has not prescribed the said rates of depreciation for the purpose of computing divisible profits.
5.The Committee notes that the rates prescribed by the Bureau of Public Enterprises are less than the rates prescribed under the Income-tax Rules. Thus, the period required to write-off 95 per cent of the original cost of the asset will be longer than the ‘specified period’ computed in accordance with Section 205 (5) (a) of the Companies Act. The Committee is therefore of the view that Section 205 (2) (c) is not applicable in this case also.
6. With regard to proper charge of depreciation in the books of account, the Committee notes that para 13 of Accounting Standard—6 on Depreciation Accounting, issued by the Institute of Chartered Accountants of India, states as below:
“The statute governing an enterprise may provide the basis for computation of the depreciation …………where the management’s estimate of the useful life of an asset is shorter than that envisaged under the provisions of the relevant statute, the depreciation provision is appropriately computed by the higher rate. If the management’s estimate of the useful life of the asset is longer than that envisaged under the statute, depreciation rate lower than that envisaged by the statute can be applied only in accordance with the requirements of the statute.”
7.The Committee notes that section 75-A of the Electricity (Supply) Act, 1948, contains in sub-section (1) and (2), provisions regarding preparation and submission of the statement of accounts, profit and loss account and balance sheet by a generating company to the promoting government(s). Sub-section (3) of the said section provides that “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 in accordance with the same method as laid down by or under this Act for calculating depreciation in relation to the Board”. (emphasis added). According to section sub-section (4) of the said section the “provisions of sub-sections (1) and (2) shall be in addition to and not in derogation of the provisions contained in the Companies Act, 1956 (1 of 1956) in relation to reports, statement of accounts and other documents required to be prepared or kept or submitted by a company within the meaning of Section 3 of that Act.” The Committee is therefore of the view that the relevant statute for the preparation of profit and loss account and balance sheet is the Companies Act, 1956, and not the Electricity (Supply) Act, 1948 and consequently the adequacy of the provision for depreciation should be considered on the basis of the requirements contained in the former Act. The Committee is further of the view that the same considerations would apply with regard to the rates prescribed by the Bureau of Public Enterprises. However, depreciation can be provided at rates higher than those prescribed under the Income-tax Rules in view of the recommendation of the Institute of Chartered Accountants of India as per its Accounting Standard 6 [para 6 above] even though such rates have no approval of the Central Government.
8.On the basis of the above, the opinion of the Expert Advisory Committee, on the issues raised by the querist in para 5 of the query is as below:
(i) It cannot be presumed that the rates prescribed by the Electricity (Supply) Act, 1948, fall under section 205 (2) (c) or (d) of the Companies Act.
(ii) It cannot be presumed that the rates prescribed by the Bureau of Public Enterprises fall under Section 205 (2) (c) of Companies Act.
(iii) Depreciation can be provided on technical assessment basis at rates higher than those prescribed under Income-tax Rules for the purpose of Section 205 (2).
(iv) Depreciation should be provided in the books of account at rates prescribed in the Income-tax Rules or at higher rates based on technical assessment.
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