3.1 Query
Treatment of unprovided depreciation and gratuity liability for computation of aggregate of paid-up capital and free reserves for the purpose of Companies (Acceptance of Deposits) Rules, 1975.
1. A public limited company has not provided for depreciation as required under section 205 of the Companies Act, 1956, for three years. The company has also not provided for the gratuity liability as per the Payment of Gratuity Act. The relevant illustrative details in this regard are as follows:
(i) Depreciation not provided for during the past three years Rs. 15,00,000.
(ii) The future liability for payment of gratuity ascertained as per the actuarial valuation as on 31.3.1987 not provided for in the accounts is Rs. 20,00,000.
(iii) The paid-up capital of the company is Rs. 60,00,000.
(iv) General Reserve and Investment Allowance Reserve are Rs. 30,00,000.
(v) There is no debit balance in the profit and loss account as per the balance sheet and there are no accumulated balance of losses in the balance sheet or any other intangible asset.
2. The company is accepting deposits from the public after complying with the provisions of the Companies (Acceptance of Deposits) Rules, 1975, as amended up to date. The point under issue is regarding the limit up to which the company can accept deposits and the computation of the net worth of the company as per Rule 3 of the said Rules. The querist has mentioned that the companies can accept deposits of the kind referred to in Rule 3(2)(i) up to 10% of the paid-up share capital and free reserves of the company and the deposits of the kind referred to in rule 3(1)(ii) can be accepted up to a limit of 25% of the aggregate of the paid-up capital and free reserves of the company. According to the Explanation under Rule 3, for the purposes of this Rule, in arriving at the aggregate of the paid-up share capital and free reserves of the company, there shall be deducted from the aggregate of the paid-up share capital and free reserves, as appearing in the latest audited balance sheet of the company, the amount of accumulated balance of losses, balance of deferred revenue expenditure and other intangible assets, if any, as disclosed in the balance sheet. The querist has further mentioned that whenever the depreciation is not provided for in the accounts a suitable note is to be given in the notes annexed to and forming part of the balance sheet quantifying depreciation not provided for and the auditor has also to state in his report the quantum of depreciation not provided for in respect of the year with reference to the profits of the year as well as the quantum of depreciation not provided so far, with reference to the value of the fixed assets in the balance sheet. In respect of the liability for gratuity not provided for also the quantum of liability not provided for is to be stated in the form of a note annexed to the balance sheet and the auditor has also to refer to the quantum in his report. The querist has mentioned that as the auditor of the company he is following this procedure as per the guidelines of the Institute in the regard. However, in many balance sheets, according to the querist, the quantum of liability for gratuity is not quantified but it is simply stated that the gratuity has not been provided for and will be treated on cash basis as and when the payment is made. In some company balance sheets though the quantum of depreciation not provided for as well as the liability for gratuity not provided for is stated they do not appear to have been considered, in the view of the querist, as a deduction in arriving at the paid-up capital and the free reserves as per Rule 3 of the Companies (Acceptance of Deposits) Rules, 1975. The auditors’ reports simply say that the provisions of Section 58A of the Companies Act, 1956 and the rules made thereunder have been duly complied with wherever applicable.
3. The querist has sought the opinion of the Expert Advisory Committee on the following issues arising from the above:
i) In arriving at the paid-up capital and free reserves of the company for the purpose of deciding the limits of the deposits whether the unprovided for depreciation is to be deducted from the aggregate of the paid-up capital and free reserves as per the balance sheet or not.
(ii) Similarly, in arriving at the paid-up capital and free reserves for determining the limits of deposits whether the liability for gratuity not provided for but computed on some scientific basis has to be deducted or not.
Opinion February 15, 1988
1. The Committee notes that the Explanation to Rule 3 of Companies (Acceptance of Deposits) Rules, 1975, explains as below:
“For the purpose of this Rule, in arriving at the aggregate of the paid-up share capital and free reserves of a company, there shall be deducted from the aggregate of the paid-up share capital and free reserves as appearing in the latest audited balance sheet of the company, the amount of accumulated balance of losses, balance of deferred revenue expenditure and other intangible assets, if any, as disclosed in the said balance sheet”.
2. The Committee further notes that the Department of Company Affairs has issued a Circular No. 4/28/8-CLX, dated 3rd September, 1981, on the subject, which is reproduced below:
“As you are aware, Rule 3(2) of Companies (Acceptance of Deposits) Rules, 1975, prescribes the limits up to which a non-banking, non financial company can accept deposits. The limits of deposits are to be computed with reference to aggregate of paid-up share capital and free reserves. Explanation below Rule 3 of Rules provides that in arriving at the aggregate of paid-up share capital and free reserves of a company, there shall be deducted from the aggregate of paid-up share capital and free reserves as appearing in the latest audited balance sheet of the company, the amount of accumulated balance of loss, balance of deferred revenue expenditure and other intangible assets, if any, as disclosed in the said balance sheet.
While it is obvious that the term ‘accumulated loss’ should also include amount of unprovided for depreciation, yet it has come to the notice of the Department that in a couple of cases companies have not deducted the amount of unprovided depreciation while computing the permissible limits of deposits. You are, therefore, requested to impress upon your constituents that it is essential to deduct the amount of unprovided depreciation from the aggregate paid-up share capital and free reserves for determining the limits up to which deposits can be accepted by them”.
3. The Committee notes that the Company Law Committee of the Institute of Chartered accountants of India, has stated in its publication entitled ‘A Study on the Companies (Acceptance of Deposits) Rules, 1975’(3rd Edition, 1986, p.20) that “the issue as to whether arrears of depreciation not provided in the accounts should be adjusted while computing ‘Free Reserves’ or not, is not free from doubt. The definition of ‘Free Reserves’ in rule 2(b) does not require such adjustment.”
4. The Committee also notes that the aforesaid Explanation to Rule 3 does not provide for the adjustment for unprovided liability for gratuity.
5. 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) In arriving at the paid-up capital and free reserves of the company for the purpose of deciding the limits of the deposits, it is advisable, in view of the Circular of the Department of Company Affairs (reproduced in para 2 above) that the unprovided for depreciation is deducted from the aggregate of the paid-up capital and free reserves as per the latest balance sheet.
ii) In arriving at the paid-up capital and free reserves for determining the limits of deposits, the liability for gratuity not provided for should not be deducted from the aggregate of the paid-up capital and free reserves as per the latest balance sheet in view of the fact that it is not legally necessary to make adjustments for the purpose of the said Rule. In this regard, the Committee notes that the ‘Statement on Treatment of Retirement Gratuity in Accounts’, has been issued by the Institute of Chartered Accountants in the context of the ‘true and fair view’ of the accounts.
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