Charge of depreciation under Section 350 in relation to Section

205(2), and Schedule VI to the Companies Act, 1956 and

Section 115J of the Income-tax Act.

1.Certain amendments have been made by Companies (Amendment) Act, 1988 with effect from 15.6.88.

2.Schedule XIV has been added for providing depreciation under the Companies Act 1956, delinking thereby depreciation under the Companies Act and Income-tax Act.

3.Under Section 205(2), 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 percent of the original cost thereof to the company by the specified period in respect of such asset; or

c) on 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 this Act or any rules made thereunder on such basis as may be approved by the Central Government by any general order published in the official Gazette or any special order in any particular cases.”

4.Section 350 provides as below:

“The amount of depreciation to be deducted in pursuance of clause (k) of Sub-section(4) of Section 349 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 expiring at the commencement of this Act or immediately thereafter and at the end of each subsequent financial year at the rate specified in Schedule XIV.”

5.As per Schedule VI, Part II Clause 2(iv)

“The amount provided for depreciation, renewals or diminution in value of fixed assets. If such provision is not made by means of a depreciation charge, the method adopted for making such provision.” 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. (emphasis supplied by the querist).

6.As per Section 355, Section 350 is not applicable to the private companies, which are not subsidiary of public companies.

7.In the above context, the querist has sought the opinion of the Expert Advisory Committee as to whether in the case of private companies which are not subsidiaries of public companies, depreciation can be provided at the rates different from those specified in Schedule XIV to the Companies Act, 1956, i.e., as per Income-tax Rules and whether it will make any difference if the company is declaring dividend or not.

8.As per Section 115-J of the Income-tax Act

“(1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee being a company, the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1^st day of April, 1988 (hereinafter in this section referred to as the relevant previous year), is less than thirty percent of its book profit, the total income of such assessee chargeable to tax the relevant previous year shall be deemed to be an amount equal to thirty percent of such book profit.”

Explanation: For the purposes of this section, “Book Profit” means the net profit as shown in the profit and loss account for the relevant previous year prepared in accordance with the provisions of Part II and III of the sixth schedule to the Companies Act, 1956 (1 of 1956).

9. As the rates under the Income-tax Rules are higher than those of Schedule XIV to the Companies Act, 1956 and the replacement cost of the machinery is increasing day by day can a private limited company which is not a subsidiary of a public limited company provide depreciation as per Income-tax Rules because Schedule VI to the Companies Act, 1956 no where restricts such companies from providing excess depreciation, and there is no other provision under the Companies Act to restrict the company from providing excess depreciation in view of certain facts, i.e., increasing replacement cost of the assets etc.

Opinion July 31, 1989

1.The Committee notes that the Research Committee of the Institute of Chartered Accountants of India, has issued a Guidance Note on ‘Provision for Depreciation’, which is published in Compendium of Guidance Notes, Vol. I (2^nd Ed.). The said Guidance Note recommends as below:

“The Research Committee is of the opinion that it is open to a company to provide for depreciation either on the written-down value method or on the straight line basis. It is recommended that the method adopted for providing the depreciation should be disclosed in the accounts. In arriving at the rates at which depreciation should be provided for 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 also notes that the Department of Company Affairs, vide its Circular No. 2/89, dated March 7, 1989, has clarified as below:

“It may be clarified that the rates as contained in Schedule XIV should be viewed as the minimum rates, and, therefore, a company shall not be permitted to charge depreciation at rates lower than those specified in the schedule in relation to assets purchased after the date of applicability of the schedule. However, if on the basis of a bona fide technological evaluation, higher rates of depreciation are justified, they may be provided with proper disclosure by way of a note forming part of annual accounts”.

3.The Committee notes that abovementioned recommendations are in the context of presentation of true and fair view of accounts of a company and are applicable to all types of companies, irrespective of whether a dividend is declared or not.

4.On the basis of the above, the opinion of the Expert Advisory Committee on the issues raised in para 7 and 9 of the query is, that, even in the case of a private company which is not subsidiary of a public limited company, after the Schedule XIV coming into force, rates higher than those prescribed under that Schedule can only be adopted if such rates are justified on the basis of a bona fide technical evaluation and in such a case, proper disclosure has to be made by way of a note forming part of annual accounts. Therefore, a company can follow rates prescribed under the Income-tax Act/Rules only if these rates are based on bona fide technical evaluation. It will not make any difference whether the company is paying dividend or not. The Committee is further of the opinion that the aforesaid will also apply to all types of companies as far as section 115 J of the Income-tax Act, 1961, is concerned.

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