1.27 Query
Provision for depreciation in accounts as per the Companies Act, 1956.
1.A Government company, registered under the Companies Act, 1956, is operating bus transport services in a metropolitan city in India. This company owns about 2,250 busses, 200 other vehicles and other non-moving and moving fixed assets. All shares of the company are held by the State Government and it’s nominees. It has never declared any dividend to it’s shareholders viz., the State Government.
2. Hitherto, depreciation on all the fixed assets was charged under the WDV method at the rates prescribed under the Income-tax Act and rules made thereunder. The recent amendment made in the Companies Act, prescribed different rates for all fixed assets under Schedule XIV.
3.The querist has mentioned that section 350 of the Companies Act is to be read in conjunction with section 349 and section 205 of the Act. Section 349 is for the purpose of managerial remuneration and section 205 relates to declaration of dividend. In the view of the querist, both the sections are not relevant to the company in question. Besides, as per the querist, in the foot-note to Schedule XIV, it is mentioned that information regarding depreciation rates or the useful lives of the assets, if they are different from the principal rates specified in the schedule, should be disclosed on the accounts.
4. The querist has sought the opinion of the Expert Advisory Committee
(i) as to whether this company can adopt the rates of depreciation as prescribed by the Income-tax Act;
(ii) if so, whether it will amount to violation of the provisions of Companies Act; and
(iii) further, if the adoption of Income-tax rates is permissible whether pro-rata concept has to be adopted or not in the case of new additions and deletions. Opinion April 19, 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, (2nd 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 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 further notes that Note No. 4 in Schedule XIV to the Companies Act, 1956, prescribed as below:
“Where, during any financial year, any addition has been made to any asset, or where any asset has been sold, discarded, demolished or destroyed, the depreciation on such assets shall be calculated on a pro-rata basis from the date of such addition or, as the case may be, up to the date on which such asset has been sold, discarded, demolished or destroyed.”
4.On the basis of the above, the opinion of the Committee on various issues raised by the querist in para 4 of the query, is as below:
(i) After the Schedule XIV coming into force, rates higher than those prescribed under that Schedule can only be adopted on the basis of a bona fide determination of the commercial life of an asset which is a technical matter. Also, in such a case, proper disclosure has to be made. Therefore, a company can follow rates prescribed under the Income-tax Act/Rules only if these rates represent true commercial depreciation.
(ii) If the Income-tax rates adopted by the company do not represent true commercial depreciation as per the aforesaid recommendation of the Research Committee and the Circular of the Department, the same may be considered to be violative of the Companies Act.
(iii) Depreciation has to be provided on pro-rata basis with regard to additions and disposals of assets. |