1.15 Query
Provision for depreciation on library books1.A Government of India undertaking is involved in the business of technical consultancy and engineering in the fields of petroleum refinery, petro-chemicals, pipelines, off-shore engineering etc. The company’s library keeps mainly technical and scientific books.
2. From the very beginning, the company has adopted the practice of capitalising the library books as and when they are acquired. However, no these books is being provided in the accounts, since, in the view of the company, the value of the books does not depreciate with the passage of time. The books which become obsolete or unusable because of wear and tear are written-off and charged to the profit and loss account of the relevant year. It is clearly disclosed in the statement of accounting policies which form a part of the accounts that no depreciation is provided on library books.
3. The company has now been advised that the aforesaid accounting policy followed by the company with regard to non-provision of depreciation on library books is not correct. The querist has therefore sought the opinion of the Expert Advisory Committee on the following:
(i) Whether the accounting policy followed by the company is correct.
(ii) In case the answer to (i) is in the affirmative, whether any further disclosure is called for.
(iii) In case the answer to (i) above is in the negative, what should be the correct treatment in the circumstances of the company. Opinion April 29,1985
1. The Committee notes that part II of Schedule VI to the Companies Act 1956 requires in clause 3 (iv) that the amount provided for depreciation on fixed assets should be disclosed in the profit and loss account and that if “no provision is made for depreciation, the fact that no provision has been made shall be stated and the quantum of arrears of depreciation computed in accordance with Section 205 (2) of the Act shall be disclosed by way of a note”. Since the profit and loss account is required to give a true and fair view of the working results, depreciation should be provided in accordance with the sound commercial and accounting practices. Section 205 (2) and 350 of the Companies Act, which prescribe the bases for calculating the amount of depreciation for the purpose of declaration of dividend and for computing managerial remuneration respectively, may be taken as indicative of sound commercial and accounting practices. In this context the Committee notes the following recommendation[1] of the Research Committee of the Institute of Chartered Accountants of India, in this regard:
“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 the above quoted sections, then the company should provide depreciation at the rates mentioned in those sections since these represent the minimum rates of depreciation to be provided.”
2.The Committee notes that one of the bases of providing depreciation under Section 205 (2) is as specified under Section 350 of the Companies Act, i.e., in accordance with “the rates specified for the assets by the Indian Income-tax Act, and the rules made thereunder for the time being in force…….” The Committee also notes that although no specific rate of depreciation has been prescribed for library books in the Income-tax Rules, yet general rate of depreciation applicable to plant and machinery may be relevant in view of the definition of “plant” as defined in Section 443 (3) of the Income-tax Act, 1961, according to which “plant includes ships, vehicles, books……used for the purposes of the business or profession” (emphasis added ). The Committee is therefore of the view that since library books are used for the purposes of business, depreciation thereon should be provided, in the profit and loss account so as to reflect a true and fair view of the working results of the company. This is because depreciation is a function of not only obsolescence but also of wear and tear.
3.On the basis of the above, the opinion of the Expert Advisory Committee on the issues raised by the querist in para 3 of the query is as below:
(i) The accounting policy followed by the company, as described in para 2 of the query, is not correct.
(ii) Since the answer to (i) above is not in the affirmative, this question does not arise.
(iii) The Committee is of the opinion that depreciation on books should be provided in accordance with the provisions of sections 205 (2) and 350 of the Companies Act, 1956.
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[1] ‘Provision for Depreciation’, Compendium of Notes (1980) pp 1----2. |